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Some interesting, though not surprising, findings from former SEC economist Craig McCann.

http://www.slcg.com/documents/EIA_Working_Paper.pdf

Equity-indexed annuities are complex investments sold by insurance companies that pay investors part of the capital appreciation in a stock index and guarantee a minimum return if the contract is held to maturity. Sales of equity-indexed annuities have soared in recent years despite the impenetrable formulas used to calculate their likely returns. Equity-indexed annuities to date have been regulated by state insurance commissions, rather than by the Securities and Exchange Commission and the NASD. In this note, we provide an overview of equity-indexed annuities. We also sketch how they can be valued. We estimate that between 15% and 20% of the premium paid by investors in equity-indexed annuities is a transfer of wealth from unsophisticated investors to insurance companies and their sales forces.

<snip>

We performed a Monte Carlo simulation on the two investments pictured in Figure 3 based on realistic assumptions and determined that 96.9% of the time the investor is better off with the Treasury securities and stocks than with the equity-indexed annuity. That is, investors sold this example annuity would be worse off 96.9% of the time, even if they held the annuity to maturity and it performed exactly as designed.

</snip>


In other words, if your financial advisor is recommending one of these high-fee products to you, he's just this side of being a crook.

intercst
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You won't get any arguement from me about the quality of index annuities but I do want to state that a Monte Carlo simulation is the "be all, end all" with regard to determining if it is a good investment. Monte Carlo randomizes the return when in fact, most historical is not that random. Monte Carlo does not account for sub par trends in the market like we saw in the 70s (flat market for a decade) and in 2000-2002 (two years or significant negative performance). Monte Carlo would like split up the performance found between the years of 2000 and 2002 so it would not seem as bad.

Also:

15% and 20% of the premium

I don't like how this is worded. Premium could relate to a sales charge, which if it were a loaded fund, the company and agent gets about 80% of the premium. In the case of a variable annuity, agents get about 50% (on average) of the total M&E. Insurance companies (and agents) get about the same from fixed and immediate annuities as well. As far as I know, there is no upfront cost for a EIA so I don't see how 15-20% is that bad. Maybe I am missing something due to the use of the word premium.
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intercst

Interesting. Do you happen to have the URL for this analysis?

From what I've read, EIA's have been very profitable to the insurance industry. And like Viaticals, the real coup d'etat here is the ability of the insurance industry to keep these prouducts out of the sphere of control of the SEC, and under the control of the individual state insurance commissioners office's. This is just the insurance industry doing what the insurance industry masterfully does.

BruceM
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In other words, if your financial advisor is recommending one of these high-fee products to you, he's just this side of being a crook.

Not just this side, but all the way over into crookville.
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BruceCM asks,

Interesting. Do you happen to have the URL for this analysis?

Here it is.

http://www.slcg.com/documents/EIA_Working_Paper.pdf

intercst
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Hawkwin writes,

15% and 20% of the premium

I don't like how this is worded. Premium could relate to a sales charge, which if it were a loaded fund, the company and agent gets about 80% of the premium. In the case of a variable annuity, agents get about 50% (on average) of the total M&E. Insurance companies (and agents) get about the same from fixed and immediate annuities as well. As far as I know, there is no upfront cost for a EIA so I don't see how 15-20% is that bad. Maybe I am missing something due to the use of the word premium.


Almost every finance or actuarial text I've read defines the full price you pay for an annuity is "the premium", so if you invested $100,000 in an equity-indexed annuity, the authors calculate that $15,000 to $20,000 of your investment would end up in the pocket of the sales agent or the insurance company's overhead and profit. Contrast this with the 0.20% expense ratio ($200 per year) that you'd pay on the Vanguard Balanced Index Fund (60% S&P 500, 40% fixed income).

intercst


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Contrast this with the 0.20% expense ratio ($200 per year) that you'd pay on the Vanguard Balanced Index Fund (60% S&P 500, 40% fixed income).

Or even compare it with the expense of buying a variable annuity at Vanguard:
https://flagship.vanguard.com/VGApp/hnw/accounttypes/retirement/ATSVarDefAnnFeesExpContent.jsp

Further explained here:
https://flagship.vanguard.com/VGApp/hnw/accounttypes/retirement/ATSVarDefAnnOverviewContent.jsp

These aren't exactly what you were describing.

There is also a fraud alert with the government:
http://www.sec.gov/investor/pubs/equityidxannuity.htm

As well as an investor alert by NASD:
http://www.sec.gov/investor/pubs/equityidxannuity.htm

Thanks Intercst!

Hockeypop



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the authors calculate that $15,000 to $20,000 of your investment would end up in the pocket of the sales agent

Wow. That would be insane.

I really wish we did a better job of educating people (as part of their public education) to avoid such practices.
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