When one will likely earn long-term gains comparable to the market without any risk of loss, what else could be better in today’s environment?
Net Advisor confuses attributes of EIAs with those of variable annuities. The only potential for loss of principle or previous gains is an insurer’s insolvency. Insurance companies have, and can, go under, but no insurance or annuity policyholder has EVER lost value due to a company failure (anyone with Net’s alleged experience knows why). Other than this virtual impossibility, there is no way to lose value in any fixed annuity.
High fees: Guarantees and illustrations are presented net of fees. The numbers are completely transparent. Commissions aren’t high for a one-time, versus transaction fees in most investments.
Free lunch: The companies credit in such a way as to minimize their risk. Over the last decade, however, many EIAs indexed to the S&P actually outperformed that index for three reasons:
1. They offered a bonus on initial deposit.
2. In years when the S&P lost value, the annuities indexed to it didn’t; they earned 0.
3. Gains credited can’t be lost in future downturns.
Why do equity indexed annuities get a bad rap?
12
Mar
Net Advisor
March 12, 2010 at 3:46 am
High fees.
Also there is a risk of loss. There is ALWAYS a risk of loss.
Basic Risks:
Market risk.
Insurance company risk.
Annuities are not guaranteed. Some plans offer “riders” (additional insurance on the product that will have some sort of additional benefit for a cost).
In the 1990’s I knew of one company that had a 5% rider, which cost a little bit, (forgot), but prob net about 4.65% a year as a minimum performance guarantee. What this did is that the insurance company guaranteed that if the annuity was held to retirement (typically 59 1/2+) or a stated date, that they will give a floor on the investment – a 5% min annual return compounded. The requirement was that the funds must be in equities (mutual funds) inside the annuity.
At the time and based on historical market standards, insurance companies estimated that the average return for the market was over 8% a year, thus they figured the likelihood of the insurance company losing was small, and they collect (ballpark) .35% extra per year as a fee on your total principle in additional to all the other fees charged.
Also at the time (mid/later 1990’s) money market was paying about 5.00%, thus the risk at the time to the insurance company was very low. With interest rates down at record lows, and the market getting whacked, these policies are a much higher risk for the insurance company. I have not seen these riders issued since 2000-2001.
Investment risk:
The index will fluctuate in value, and can lose money. Anyone who tells you cannot lose money investing, or that one can never lose money investing in an annuity would have some serious compliance issues/ litigation risks.
It would be better to max out all retirement plans and a Roth IRA before purchasing an annuity of any sort, with few exceptions.
Annuities are an option for people who have done the above, have high level of assets who want to defer capital gains due to their high income tax situation.
The other situation is a person with a whole life policy that is maturing and capital gains may be coming do. That person can do a 1035(a) “tax free exchange” and roll over all that equity from the maturing whole life policy and put it into an annuity, deferring the income tax liability until retirement and until withdrawn.
Mr. Prefect
March 12, 2010 at 4:45 am
Annuities are very costly, which no one will tell you, as they provide much commission to the seller. It takes years to build any wealth, also which no one will show you, since that huge commission looms large in their mind. If markets go up, your annuity will also, if they go down, the annuity follows.
There is no free lunch anywhere. If there were all of mankind would be there way ahead of you and me.
MVD34
March 12, 2010 at 5:09 am
The short answer is that they do not work as promised.
Or, more exactly, they do exactly what the fine print says which is not what investors are lead to believe when they are sold the investment.
The longer answer is that they are sold as an investment that will grow at the greater of a base rate or the market return. All upside, no down side. As a practical matter, such a thing would be extremely expensive — no rational insurance company would take all that risk without any upside (That is, if you — the investor — have all upside, the seller — the insurance company — has all down side) He HAS to be able to make money some how….otherwise he would never sell such a thing. Ask yourself this question — would you make a promise like that to someone? I’ll take all the losses and give you all the gains? Never.
When you read all of the fine print, you generally find four “gotchas:” (1) the fees and commissions are extremely high (and reduce the amount of money you actually have invested), (2) the market return (“the upside”) is limited in technical language in such a way as to ensure that they never pay out a significant stock market return on the gross amount you have invested, (3) the way returns are calculated are manipulated in technical language in such a way as to ensure that the product usually pays out the way standard annuities do (variable rate), and (4) significant (market) losses are never totally absorbed by the insurance companies — again in technical language — the principle value of your annunity can go down under a number of situations.
Benefits Transition T
March 12, 2010 at 5:30 am
For the individual who is saving long-term for retirement, has low or no risk tolerance, and wants market-like performance, there is simply nothing better out there.