Sound too good to be true? It’s probably an indexed annuity

One of the most over hyped and improperly sold financial products in recent history is creating the type of news that the annuity industry doesn’t want. With an unregulated sales pitch that often sounds “too good to be true,” it’s predictable that the spotlight would continue to find indexed annuities.

What all the fuss is about

Fixed-index annuities, or indexed annuities, were designed in 1995 to compete with CD returns by typically using a one-year index call option on an index, usually the Standard & Poor’s 500 Index. Because it’s a fixed annuity structure, your initial premium is protected and any contractually limited gains from the call option are locked in annually.

Sounds reasonable to most, so what has gone wrong?

Sales message madness

In typical fashion to attract more sales, the annuity carriers have added all kinds of “shiny things” to indexed annuity policies to attract middle-class and baby boomer money. Upfront signing bonuses and high-percentage income riders (an attached benefit only used for income) enhance a lot of sales for the wrong reasons. Some promoters now improperly use the word “hybrid” as part of the indexed annuity sales pitch.

Too many indexed annuity buyers think they are getting “free money” with upfront bonuses — Jimmy Carter type yield with income rider percentages — and market upside with no downside. This is tragic, completely false, and too often describes the agent’s sales message.

The courts say it’s a duck

A recent ruling in Illinois has resurrected the argument of whether an indexed annuity should be categorized as a security. Currently the product is classified as a life insurance product, which means you could get your state license to sell it in less than two weeks! Round one of “is it a security?” argument was a victory by the all-powerful life insurance lobby, but the war is definitely not over.

The Illinois case is such a threat to the current indexed annuity industry status quo, that the National Association of Fixed Annuities (NAFA) is actively soliciting funding from its members and agents for an Amicus brief filing to fight the case. Crowdfunding for legal expenses anyone?

Another boring product for hedge funds?

We all remember when the ‘masters of the universe’ Wall Street mavens focused on a boring product we all know as mortgages. Not a good ending to that story to say the least.

Private equity’s newest play toy are indexed annuities. Over the past few years, these big money players have quietly purchased indexed annuity carriers and have grabbed market share with aggressive promotion and pricing. Let’s hope that their “greed is good” mantra has turned into “lifetime income for boomers is good” because a lot of retirees across America are depending on their long term commitment. Another concern is if “long term” has been added to the current list of short-term strategies on how hedge funds make money.

In a recent NY Times article by Mary Williams Walsh titled “Risky Moves in the Game of Life Insurance,” she described some questionable activities of specific hedge funds now in the insurance and annuity space. To say that she rattled a few annuity industry cages is an understatement, and her findings made a lot of us question some of the accounting procedures now being implemented by these new annuity owners.

States slow to act

Because indexed annuities aren’t yet deemed a security, the product is regulated at the state level. For annuity promoters and advertisers, their unregulated sales pitches predictably are run on national TV, radio, and Internet platforms. These product hype-sters know that if indexed annuities were classified as a security, their ads would immediately be pulled and regulated.

A current required CE course I took on annuity suitability pointed to examples of specific indexed annuity sales messages that aren’t approved, but are familiar to most because these pitches go largely unregulated:

“What if the market goes down and you would lose nothing?”

“A win/win investment vehicle!”

“Growth potential without market risk.”

Different versions of these too good to be true sales pitches are found with the majority of indexed annuities sold today, and securities regulators point to these types of sales messages as examples of why indexed annuities should be subject to security advertising rules.

Good product gone sales rogue

It seems that the annuity cowboys are running the indexed annuity rodeo, which is a shame. The product is a good alternative for CD type returns, and can be an efficient delivery system for income riders to solve for future income needs. The strategy does have its place when fully understood by the customer, and when the level of performance expectations are in line with contractual realities.

Now that banks and brokerage firms have joined the indexed annuity sales party, get ready for the “hybrid pitch onslaught” from every angle. All I can say at this point is to use some common sense when considering the product — and don’t buy the dream that’s too often being sold.

Originally published by 4.21.15 –