Imagine a neighbor knocks on your door, complaining he is “tired of your kids misbehaving and acting out of control.” Claiming he’d be a better parent than you, he picks up your kids and takes them home.
Wild imagination? Not if we’re talking index annuities. Last month, the Securities and Exchange Commission Chairman Christopher Cox behaved like that angry neighbor. He charged that too many index annuity agents are engaging in abusive sales practices and then proposed regulating IAs as securities, not insurance. In effect, he wants to take IA regulation away from the states and give it to the SEC.
A careful reading of the SEC’s 96-page proposed Rule 151A (File No. S7-14-08) makes clear that the SEC has some major misconceptions about IAs. It’s time to debunk them. Here’s my Top 10 List. (Note: all supporting data below come from research by Annuityspecs.com.)
Misconception 10: All IAs have high surrender charges. Actually, over 45% of IAs sold had 10-year surrender charges as of 1Q 2008. Note: NBC-TV’s Dateline expos? on IA sales earlier this year highlighted an IA with a 16-year surrender charge, but it was one of only 2 index annuities having the longest surrender charge duration in the industry. Ignored was the fact that some IA surrender charges are as short as 1 year.
Misconception 9: All IAs pay big bonuses. Not so. Many IA advertisements do involve big bonuses of, say, 10%. However, top selling IAs tend to have more modest bonuses. As of 1Q 2008, for instance, over 23% of all IAs sold had a 5% premium bonus. Keep in mind that carriers usually need a longer surrender charge to offset a premium bonus, so some of these IAs have longer surrender charges.
Misconception 8: All IAs pay high commissions. In reality, the average street level commission for all IAs as of 1Q 2008 was 6.89%. Judged by IAs sold, the average IA agent commission was 8% of premium in that quarter. One IA did pay as high as 13%, but keep in mind that some IAs pay as low as 1%; also, IA commissions are paid one time in exchange for the agent servicing the policy for the entire term.
Misconception 7: IAs are just used to target seniors. Let’s get real. Do cereal companies “target” children with breakfast cereal? No, but children are the primary demographic for cereal, just as seniors are for index annuities. IAs are retirement income products, folks, and usually people retire when they become seniors. Gasp! How predatory of the financial services industry. (Note: The average IA issue age in 1Q 2008 was 63.)