Why Indexed Annuities Are CLEARLY Insurance

Since the SEC has become involved in the debate about whether or not to reclassify the insurance identity of EIA’s, it is important that they consider a few key elements about indexed annuities which clearly differentiate them from the components necessary for a product to be classified as a security.

The key word in eliminating any confusion on this discussion has to be RISK. Securities are regulated in the manner they are because any investor buying a security accepts a huge amount of risk, and the intense regulation is designed to make sure that an investor only takes on that risk with complete and factual information. EVERY securities product offered has the “potential” for the investor to lose some or ALL of their investment capital. This fact is essential to grasp if you are going to understand the complete difference between an indexed annuity and EVERY securities product.

In any purchase of a security, the client assumes ALL of the investment risk. That means that the investor acknowledges, at the onset, that they realize there is absolutely no certainty that their investment will ever earn them one dime in return, and that they could possibly lose some, or ALL, of their original investment. In an indexed annuity, however, the client does not assume ANY investment risk whatsoever; the insurance company retains it all. The client does not tell the insurance company how to invest their premium dollars in order to make sure that the company can later fulfill the contractual obligations. The insurance company is responsible for managing the premiums they receive in the purchase of indexed annuities in a way to be able to provide the contracted benefits to all policy holders. The oversight responsibility to ascertain the ability of an insurance carrier to financially do this is monitored, not only by the state insurance departments where they do business, but is regularly reviewed by a number of independent rating agencies, such as A.M Best, S&P, and Weiss.

The client’s premium dollars used to buy an indexed annuity are therefore, not an investment in any security, but are the purchase of a very specific and detailed, long term insurance contract between the annuity purchaser and the insurance company. This contract entitles the owner to a group of benefits, including interest credits on money deposited, income options, withdrawal privileges, death benefits, and the terms and conditions for early partial of full surrender of the contract. The policy, along with all of its details are provided to the client up front in writing and the client is even given a state mandated right of refusal period before they are bound by the terms of the contract.

If this is not enough proof, the enormous distinction that labels indexed annuities as insurance are in the guarantees provided in the insurance contract that are completely absent from any securities purchase. The client’s premium dollars are guaranteed not to lose value, within the terms of the contract. In most indexed annuities, a minimum rate of return over the life of the contract is also guaranteed. In addition to the guarantee of premium deposits and the minimum interest credits, the unique feature which gives indexed annuities their name, is that the client is offered the potential to receive a higher rate of interest, determined by a clearly defined strategy of using changes in some named index as the measurement of how much extra interest to credit over given periods of time. And the best feature included in most indexed annuities is that once interest has been credited to an account, it is “locked in.” That means that the only way a client’s account value can ever go down, is for them to personally and intentionally reach in and take money out of their contract.

In a later blog I plan to address some of the rhetorical misstatements and lies used by the opponents of indexed annuities. But for now, just using the above information, I hope that the SEC, and anyone else who has questioned the insurance identity of indexed annuities, now understands why they are in no way a securities product, and should never be brought under the jurisdiction of the NASD or any other securities regulatory agency.