What is an equity indexed annuity?
This annuity is a product that promises to deliver equity-like returns with no downside risk. FINRA appropriately calls an "equity indexed annuity" a complex instrument with confusing methods of crediting, such as the tricky method I recently wrote about. The SEC notes they are often used in senior fraud. These products lock consumers in for periods of ten to 15 years, and insurance companies pay handsome commissions to agents that sell them.
An insurance industry spokesperson calls me on my ignorance
Annuities make up less than 10 percent of my columns, yet are the subject of 90 percent of my hate emails. Some of the emails happened to be from Sheryl Moore, chief executive of AnnuitySpecs.com, claiming to have the authority to speak on behalf of the indexed insurance industry on certain matters.
One of the many areas that she felt I was displaying ignorance, was in using the term "equity indexed annuity," which Moore stated had, in fact, not been used since the late 1990s. Perhaps she's not familiar with FINRA, the SEC, or the millions of use of that term on the internet. She insisted the term "fixed indexed annuity" was the new and appropriate term, as this was a fixed income product.
An official warning from the insurance industry
Moore threatened to unleash the wrath of the entire insurance industry on me and I accepted.
Allan. I can get a petition for you with hundreds of thousands of names of people who would join me in not caring for that term either, including the CEOs of every insurance company that sells these products, the regulators that govern them, and the agents that distribute them.
I responded that gathering 200,000 signatures from industry insiders not caring for the term would only prove that they preferred the new branding of indexed annuities. I agreed not to use this term if she met the challenge by year's end, and I'll tell you why in a bit.
The current brand - "equity indexed annuities"
Though I'm not always a fan of the financial media, they have done a great job of exposing equity indexed annuities. Take this Dateline NBC hidden camera investigation from 2008.
In the video, agents make false claims, unfair comparisons, withhold key facts, and a host of other misleading methods to get the consumer to buy the product. Moore, however, claims that the industry has cleaned itself up since then, and every consumer now understands the crediting of the product they bought.
Current industry practices
Since Moore claims to be able to speak on behalf of the insurance industry, at least on some matters, I decided to listen. In my view, in her many lengthy emails, she used some of the same tactics as in the Dateline video.
- Comparing a fixed income product to equities - While Moore despises the term "equity" since she claims they are fixed income products, she states "No indexed annuity purchaser has lost a single dollar as a result of the market's declines."
- Inappropriate comparisons - When I noted these were fixed products rather than equities, she compared them to CDs claiming they were similar. Translation - Claiming insurance companies are just as secure as the U.S. Government, and 15 year surrender periods with high fees are the same as typically two months to a year's interest penalties at banks.
- Making false claims - "Access money when you need it" was a claim Moore made. She did note that it was only 10 to 20 percent annually, yet neglected to mention the high penalties for anything beyond. I've never seen a product that allowed for more than 10 percent annual withdrawal and, with many, consumers forfeit the benefit of riders they have been paying for.
I can't wait to get the 200,000 signatures, including every CEO of every insurance company selling this product by the end of the year. When I have this petition in hand, the media can then hold each CEO accountable to follow the standards claimed by their industry spokesperson, Sheryl Moore.
My challenge to the annuity industry
Syndicated financial columnist, Scott Burns, said it best:
Personally, I believe that the invention of insurance is one of the great achievements of western civilization--- it is a wonderful tool for coping with the uncertainties of life, and death. The only thing I regret is that it is in the hands of the insurance industry.My challenge to the insurance industry is if you don't like the way the media is portraying annuities and other insurance wrappers, try changing your practices rather than your name. Simple disclosures and crediting methods consumers can understand would be a great start. Your instruments are so complex, that I've never even found one agent selling these instruments that understood how they worked.
I challenge insurance companies to stop training agents to act as financial evangelists who can ignore facts, and use deceptive logic and sales practices. Cleaning up these practices will be far more difficult than a name makeover.
Bring on the hate mail!