Do Fixed Indexed Annuities Cost More Than Other Fixed Income Annuities?

TO: Jeff McClure Thank you for your comments. Here is my response to the issues you raised. 1. The data for the FIA in the paper did come from an actual policy. I can send you the illustration if you are interested. 2 The paper is not meant to show that ALL FIAs pay more than other income annuities. There are indeed variations in benefits offered by different insurance companies. Another advisor may choose to use different products for comparison. I’m an independent advisor, and have access to many FIAs with the highest income benefits on the market. It is possible that some FIAs have lower benefits than comparable DIAs and SPIAs. That’s why I state in the paper that advisors should understand the ‘true benefits’ of a policy that they recommend to clients. 3 The purpose of the paper is to point out that FIAs do not categorically cost more with less benefits than DIAs and SPIAs, as it is commonly believed. 4 The focus of the paper is on income benefit. If FIAs are properly used for retirement income, clients can expect to get the specified lifetime income benefit from the policy. The client who bought this FIA policy and who went through all the contract provisions with me understood that she would get the specified payout as ‘guaranteed lifetime income benefit’ under the lifetime income benefit rider if she followed the terms of the contract without using the policy for other purposes. 5 Your comment that the fine print in a policy may allow insurance companies to make changes is generally true as insurance companies always reserve the right to make policy changes due to expenses or other reasons. However, it is important to note that such changes may not have any impact on the fundamental income benefit that is guaranteed under the lifetime benefit rider that is part of the FIA policy I used for this paper, unless the owner/annuitant deviates from the basic provisions for the benefits. This is why it’s important for advisors to understand all the terms and the benefits of a policy that they recommend to clients. 6 You indicate that the benefit payout may change over time due to company adjustments on expenses. For this FIA and many FIAs currently on the market, the benefit payout is fixed for the life of the policy at the outset. It is because these FIAs determine the payout amount according to the bonus interest or ‘roll up’ account, which has a fixed rate and which is by and large not affected by the accumulation value based on index growth or policy changes due to company expenses or other reasons. 7 FIAs appear to be complex. However, if they are used primarily for retirement income purposes, the focus should be on the income benefit that is fixed and ascertainable at the outset, rather than the potential accumulation due to certain index growth, which is very limited and unreliable. A critical problem with FIA is that it is presented as both an income as well as an accumulation vehicle. Personally, I would not consider or use FIAs as a vehicle for accumulation. Thanks again for your comments. Eva L. Levine

It is interesting that you have no references or other citations. Are your figures from a sales proposal or actual results from annuity payouts? I have been in the business of providing investment advice for 36 years and have found an astonishing difference between the sales proposals provided by annuity companies and the actual payouts over the decades. Buried in the fine print in the contract one will commonly find escape clauses that allow the insurance company to adjust expenses and those make a huge difference.