Some facts about index annuities
By Bob Moeller
WEAC Member Benefits
October 2006
Financial
Planning Seminars
Achieving
Financial Independence
Welcome back! In one of my articles last year I was critical
of index annuities. I received an irate letter from a salesman who informed
me I didn’t understand index annuities. He accused me of looking
for the negatives in this product (which I freely admit I do; that’s
my job). He acknowledged that some index annuities are not good products
but maintained he was an expert after years of selling and he sold good
products. He even volunteered to help me write a correcting article.
Much as I might need help with my writing, I decided just to ask him
to send me facts about his products, which, to his credit, he did.
So, below is my letter to him which represents my analysis
of one of his index annuities, specifically, the Allianz MasterDex.
Later, I realized I had failed to mention that the product had a provision
which provided that once you had received a value at the end of the
year which was higher than your previous high value, you were assured
of getting at least this value when the contract terminated. This is
a positive provision.
• • •
Dear Sir: I am going to state what I interpret to be the
facts of the Allianz MasterDex statement of understanding. I am asking
that you correct me if I am incorrect.
- You are investing in an index annuity.
- If you complete the seven-year term and surrender the policy, you
cannot lose money.
- If you do not complete the seven-year term, you will pay a withdrawal
penalty as high as 10% and no lower than 4% if you withdraw your money.
- You may get an increase in value each year based on the monthly
change in your index.Your increase each month can be limited at the
sole discretion of Allianz to as low as 1%. Any decreases are unlimited.
That means if the index goes up 2% per month for the first 11 months
and your limit is 1%, you will end up at the end of the 11th month
with an increase of 11% even though the index went up 22%. If in the
12th month the index goes down 12%, you will end up with no net gain
for that year at all even though the index itself was up 10% for the
year.While not likely, over seven years, the index could go up a net
of 70% and you could get nothing.
- If you have a gain at the end of the seven years and you withdraw
your funds, you will pay regular income tax rates on the gains, not
capital gains rates.
- If you should have a gain in your account and die before withdrawing
the funds, your heirs will get no step-up in cost basis which would
save them income taxes.
- As an alternative, if you actually invested in an index fund you
give up the “can’t lose money” guarantee but get
all the gains.You also get any dividends credited to the index.You
also pay long-term capital gains rates on any long-term gains. If
you die while owning the index, your heirs will get a step up in cost
basis for tax purposes, which will save them income taxes.
While I don’t have data for sevenyear periods, statistics show
that the S&P 500 index has NEVER gone down over any 10-year period.
Again, I am asking that you correct any errors in the above.
Finally, as you probably are aware, the financial industry is undergoing
a period of self-examination regarding the degree to which various practitioners
accept the fiduciary standard with their clients. If one of my members
asked you to take fiduciary responsibility in selling them this product,would
you?
• • •
I have not heard back from the salesman. Need I mention again that
highly regarded, large insurance companies like Northwestern Mutual
refuse to sell these?
Do I still feel index annuities are not good deals? Absolutely.
Consumer Reports Magazine (see quote in left column) says that both
index and variable annuities are generally bad investments.True.
This article was about indexed annuities. As an example of the excessively
high costs in variable annuities, in the Wall Street Journal on September
11, I reviewed the ING Golden Select Premium Plus Max 7 (wow, what a
title). This fund has many investment choices and almost every one has
annual fees in excess of 3% which is ridiculous! Even their index fund
fees are 2.8%, compared to Fidelity’s 0.1%. Fees 28 times higher!
I frequently receive messages from members who are confused by the
complexity of investments. I believe you can simplify it greatly. One
of the first rules is to just say to yourself,“ I will not buy
any investment products from any life insurance company.” Period.
No, you will not miss out on any wonderful opportunities.
Posted November 11, 2006