My clients are concerned about the long-term safety of the institutions backing EIAs. What can I do to calm their nerves?

Insurance companies have an exceptional record of protection. The states require that an insurer must keep enough money to cover the current and future obligations of the policies issued, plus a little bit extra. This money is referred to as policy reserves, statutory reserves or legal reserves. Insurers are restricted in the amount of stocks, real estate and junk bonds they may own and must invest mostly in investment-grade bonds. In addition, the surrender charges allow the carrier to maintain policy liquidity by regulating outflow to avoid runs on the bank. And as a last resort, every state has a guaranty fund and every annuity owner covered by a guaranty fund has been protected up to fund limits in the past.

On providing index-linked interest, insurers are protected because they limit their risk. The exposure in an index annuity for the typical insurance company is the cost for the option link a set and predetermined cost. If you had a dollar, made five cents interest and spent the five cents to buy an option on the index, and the index went down 50 percent or the index-link provider went bust, what is your maximum loss? Five cents. How much do you still have? One dollar.