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Mass Mutual‘s main line of biz is variable annuity; hence, I can see why they would champion the risk side.  There’re many many many crediting methods for equity linked annuities.  Quiet a few of the big players offer a either a much higher total annual caps, or percentage capture of the index market w/o a cap—outside of surrender charge, there’s no back end or front end load--ALL WITH THE SAFETY & GUARANTEES offered by the contract, a dollar for every dollar that’s MINIMIALLY GURARANTEED.  Just like CD’s & bonds, safety almost always has a trade off with liquidity.  Just like CD’s, the overhead expense is already accounted for by the value of the contract.  This might be hard for security driven ladens to understand.  Your side isn’t in the risk management side, we are.  There’s an article comparing real performance of many different asset class performances over a 5 years period from S&P 500 to equity index annuity—not hypos but real asset class return averages.  It showed that the index fund had about 5% return over the 5 year period, but the equity index annuity (which was linked to the same index fud) had over 30% return.  This is the power of EIA—where the crediting methods vary widely from product to product, & carrier to carrier.  Just like one needs to be study the whole gamet of your biz to try to minimize risk, for a potential gain, our side the only risk factor is making sure our customers are linked with a suitable product to meet their needs and finding portfolio to meet it to maximize return—the ‘no loss’ guarantees are built into the contract if they carry it to term just like CD’s or bonds.  Unlike most bonds or CD’s though, most EIA have built in liquidity features that would probably make it a better fit than any of its safe competitors. 

There has got to be something done to stop misinforming the public the way you’ve in your article.

Huda

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@Huda,
 
                It is not misinforming the public to tell them facts such as class action lawsuits, attorney general lawsuits, SEC and NASD issues, and studies/comments from credible sources that conclude EIA contracts are not attractive investments in a world of comparisons. That is what the second column did. Allianz, a party to the lawsuits is also a major variable annuity vendor.
 
Scott

This column  appeared in our newspaper ( Austin American-Statesman) on June 3, 2007. After reading it,  we're very concerned about a Long Term Care  policy we just signed on for with Allianz. If the company has, or is headed for, deep financial problems regarding their Long Term Care Insurance...how can we find out.  We have 45 days to look over and accept or rescind  this policy.

We need advice in a hurry, but don't really know or where to find answers. Any assistance you can offer would be appreciated.
I plan to check out your web site to see if there is anything timely there, relating to Long Term Care policies.

posted from email 

 The lawsuits referenced in the column were related to Equity Index Annuities. They were not related to Long Term Care insurance provided by the same company. So there is no immediate reason for concern. Unfortunately, the delivery of LTC insurance has been plagued with offers that have ended in much higher premiums as people have aged, so there is no way to know how your particular policy will turn out. Personally, I think long term care insurance is a good idea but have enough doubts over its delivery that I have yet to purchase a policy--- though I am 66 and my wife is 64.

You are right on EIA's.  I see way too many of these, with huge surrender charges and very little upside.  The worst is that clients have no idea of what they are buying.  Why these products are no better regulated shows the strength of the insurance lobby.

Jason

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 Yes, that’s exactly what it looks like. And someone who has been run out of the securities business can move right into selling EIAs because no securities license is required.

I highly doubt that you will respond to this, but I needed to say a few things.  You are trashing Fixed Indexed Annuities and do not even have all of the facts.  In the past 56 years the S&P averaged an 8.7% return.  You are correct in that an Indexed Annuity will never return what the market does.  Only the market returns what the market does.  If an indexed annuity would have returned an average 7.6% during the same 56 years, would you say that it was a good product?  Why are you not going after the Millions of people that purchase CD’s?  They clearly do not keep up with inflation.  Indexed Annuities are not intended to keep up with the market; they are an insurance product with Guarantees.  You, like so many others, speak before learning.  I will concede that there are bad annuities out there and I hope that agents and clients will do their homework.  But you are trying to lump all of them together and to be perfectly honest come across as an idiot.  I do enjoy your article as it will help agents show their clients that the negative publicity is coming from uneducated individuals such as yourself.  So, I thank you for that.

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It appears that the only people who think I am an idiot are those who sell the product. Many financial advisors have written to thank me for the EIA columns because they have seen the damage they have done to the elderly.

 

Scott

Hi Scott,

Don't understand why you would suggest investing in a TIPS if I can currently get 5% in a CD?  

Thanks,

Laura

Laura,

 

      According to Bloomberg.com 5 and 10 year TIPS are selling at a yield of 2.7 percent--- plus the rate of inflation. At 2.7 percent any inflation rate over 2.3 percent will give them a yield of 5.0 percent. The trailing 12 month inflation rate is 2.6 percent and appears to be rising. To me that means TIPS will probably provide a better return over the next few years than CDs of similar maturity.

Mr, Scott,, I recently read an article that was published in the news paper in Texas you had written about EIAs. This article was a real joke,,who are you? and where did you get your information from? are you trying to scare the elderly into giving you $495.00 for a review of their EIA contracts? I am compelled to contact the insurance industry of your state to let them know how you are conducting business. I am not condoning the agent that intentionally sell the wrong product to a senior,but this can happen in ANY sales including the business you are in. I have several annuity clients in EIAs and are very happy with their returns of 12% an 11% .. Its just like in what you do in securities..I see you sell index mutual funds? is there no fees involved?do you not make a commission?why don't you leave the investigation to those in the government that get paid for it and have accurate information!

I think you need to read more carefully. I am not soliciting for a $495 fee. That option was one of many sources mentioned in that column that conclude EIAs are (1) not a reasonable investment compared to alternatives and (2) are likely being inappropriately sold to older people. I was citing research by respected people and institutions, including a major company in the insurance industry.  My reader mail, which comes from all around the country was indicating the same thing months before I decided to write about EIAs.

If you take the trouble to go to my website you can read my bio. You will learn that I have been a personal finance writer since the early 70s, that I became a personal finance columnist in 1977, that I was first nationally syndicated in 1981, and that I retired from the Dallas Morning News late in 2006. Only since then have I become an RIA and I did it largely out of frustration that no one else was doing it in the way I thought it should be done--- in index funds at very low cost. We are not in the commission business and we manage portfolios for 50 to 25 basis points.

I read your article in the Dallas Morning News on Sunday 15 April, 2007 regarding Indexed Annuities. I also read your second article on June 3rd. I frequently read your column because I am retired and living off social security and my investments. I own two index annuities along with mutual funds, I bonds, and real estate. Compared to my experience with index annuities and annuity salesman I have to say I thought your article was the most prejudicial and non-fact based of any article of yours I have ever read.  My understanding from the insurance agent was that annuities were created to perform in two ways: to capture the gains in an up market and to avoid the losses in a down market. Nothing more was promised and that is exactly how my two annuities have performed. In the last two years both my annuities have experienced double digit growth and that growth is now locked in and not subject to a market turndown which is what most of the financial letters I read are predicting. I couldn’t be more satisfied.

Having read your article for many years it seems to me you have a tendency to “throw the baby out with the bath water”. My agent told me that there was some annuities that were not set up to perform well over the duration of the contract but there were annuities that performed well and would help me accomplish my financial retirement goals. I think he helped me and gave me good advice. My wife and I are very satisfied. By the way we met him at a “free dinner and seminar” which you also bad mouth and in one of your articles encouraged people to skip.  In contrast the seminar was very informative and covered a number of topics that have helped us in our planning. And by the way the meal and the company around the table were wonderful. If I were to sum up your letters over the years it seems I could boil it down to only two things you like: consumption smoothing and indexed funds you have selected as a part of your various portfolios. I think that is just a little prejudiced.

Doug Madden, Dallas, TX.      

posted from email 

Thanks for your note. There is no prejudice in my columns except this: Over the last 40 years--- which is how long I’ve been studying and writing about personal finance--- I have developed a skepticism about insurance claims versus insurance results. As a practical matter, however, the same testing applies to insurance products as to mutual funds and other investments.
 
Your results over a period of a few years are not indicative of longer term performance and the restrictions on access to your money are such that 10 years is a better measuring period. The longer term research work I have seen, such as the Mass Mutual work cited in the second column, indicates that the long term returns on typical EIA contracts will be on a par with short term Treasury returns, or less. You can do that with greater certainty and lower penalties by investing in an insurance based CD like product.
 
In the end, it has to be about the return, the risk, and the liquidity and that’s where experts such as those cited in the column come to the same conclusion as I do--- long tunnel, no cheese.
 
Scott

Hi Scott

I read your article on Allianz.  I am an investor in the Allianz annuity.   Can you tell me if my investment is safe or should I pull out.   I have been in 3 years out of the 10 year contract.  I know Allianze is very large and I assume my investment is safe, can you advise. thank you.

David

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