Annuity IQ

I am sure you have seen the news or at least heard about what is going on. It appears that oil has appreciated over the past year at an astounding rate. Well there is nothing like beating a dead horse so we figured we would talk about what is going on and the impact it will have on our economy.

Those who think that prices are going to come back down, I am sorry but you will be waiting for a long time. The problem is not so much supply and demand as it is speculators who are driving up the price of oil because of the weak dollar and increased demand. To think that demand will stay the same is absolutely ridiculous. According to the experts we are at the breaking point for the consumer, or close to it. Many experts predicted that consumers cannot handle $4.15 a gallon fuel…and they are right.

Americans are people who build themselves upon debt. We get big expensive cars, houses and electronic toys. Unfortunately no one actually pays with cash and more, they charge it. When someone charges their fuel or expensive toy they rarely think of the bill that is coming next, from the credit card company. What does this have to do with the price of oil, plenty. Americans are now charging the gas that they use in their big SUV’s for the demanding terrain of New York City. With the credit mess still in full swing, and it is, this is the next big thing to hit the economy.

While the Fed can print money to their hearts delights what they cannot do, for the consumer at least, is create more credit. As home equity loans sputter out borrowers will continue to use their credit for purchasing power, but a larger chunk of that purchasing power will go towards fuel. As credit lines are reached we will then see demand come down even more than it has already.

The other major problem we have is the fundamental demand for oil is high, but the supply is exceeding demand in most cases. OPEC is planning a meeting with consumer nations to make this point, OPEC for crying out loud. These are the guys making a trillion dollars a year on oil and they are saying this isn’t right? By no means am I a rocket scientist, but that tells me that the price is unwarranted.

Unfortunately $150 a barrel oil is coming and prices will never be below $3 a gallon again. Once oil companies get a taste of these obscene profits they tend to like them. Plus with China and India following in the USA’s mistakes by building an oil based economy we will see future demand spike even higher. Sadly if some of the oil projections are correct we could see the supply of oil dwindle in our lifetime - it is projected that by 2013 oil production will plateau and then decline - and $4 gallons will be the good old days. The increased demand from China and India will dwarf our reduction in oil consumption and will drive prices higher.

My point is things will not change because the industry has broken us in to higher gas prices, since Katrina. We went from saying; “$2.50 a gallon! Are you Nuts!” to “$2.50 a gallon is a STEAL!” and that number has moved, now $3 a gallon is a steal and a recent memory to. So, I foresee a double whammy coming in the near future, higher gas prices and the credit crisis spreading directly to the consumers because of their credit card debt. Makes you wonder if the Fed will give us 2% loans to make it….oh yeah thats only for the people that matter, big business. Think smaller cars and happy thoughts and it just may all go away.

Annuity IQ has been put in an awkward position since we launched nearly 3 years ago. We are committed to not sell annuities to the public, but we are inundated with consumer requests for annuity quotes. After much debate and discussion we decided to continue to not sell annuity products. However, to help consumers we have teamed up with a firm that will provide annuity quotes to those interested. The page can be found here: Free annuity and life insurance quotes

While we are not in any way connected with the firm providing the quotes it is a better way for consumers to compare and shop for annuity products. The firm we have teamed up with is also there to help financial advisers in their quest to grow their business. advisers can now receive qualified leads to help grow their business and improve the lives of investors. To sign-up and start receiving leads financial consultants should go here: Annuity Leads

The goal is to help both the consumer and the financial adviser and lessen our burden of turning would be annuity buyers and lead seeking advisers away. Through our new relationship we can help both parties and continue doing what we do best, review and rate variable annuity contracts. However, we are in the process of launching our very own trusted adviser network were financial professionals can go through a rigorous review and list their services and website from Annuity IQ. The projected launch date for the directory is 5 days, if not sooner, more to come in the near future.

ING decided to make some changes to its LifePay Plus living benefit after a recent upgrade just issued last summer. The new benefit was revamped last week and Annuity IQ is working on updating the information as soon as we receive the prospectus.

This is just one reason why we exist as the industry constantly upgrades and changes its benefits and contract information. It is next to impossible for advisers to keep on top of these changes and consumers stand little or no chance of ever understanding how these benefits work.

Through Annuity IQ we have helped well over 1500 people to understand and compare living benefits on variable annuity contracts. We continue to serve advisers and the public and are in the process of updating our site and the way our information is presented. Keep checking back!

For years The Hartford’s Director variable annuity was the rock of the variable annuity industry. For almost a decade it was the best selling broker sold variable Annuity product, behind TIAA-CREF. Last week that legacy came to an end as the Director variable annuity ceased to exist for new investors and was folded into the Hartford Leaders product.

The Hartford’s Planco division once boasted that the Director product will always be the best selling variable annuity with the Leaders product a close second. Sadly, they were the last to see that the writing was on the walls years ago and single managed variable annuity products were irrelevant. In 2005 they tried to turn the ill fated Director Annuity around by introducing a multi-managed approach, they added some 55 different sub-accounts from various managers.

What they did not count on was that their success with the Hartford Leaders product would undo what they were trying to accomplish. The Leaders variable annuity had 4 main fund families that went deep, offering many sub-accounts from each manager. All of the fund families were top shelf names, American Funds, Franklin, MFS and AIM which are among the top selling fund families in the advisor arena. The Director annuity though went for the shallow and wide, offering many Hartford sub-accounts but only a smattering of other money managers.

The Leaders annuity saw huge growth, from nothing in 2000 to $10 billion or so in recent years. That success, in our opinion, tainted the efforts of the Director product. Also, the other issue was saturation of the marketplace with both the Leaders and the Director wholesalers covering the same advisors. It was total overkill.

It was no surprise that the Director failed, it was too little too late.

Do to the reaction from our comments on the Dateline NBC story, “Tricks of The Trade”, where they performed an expose of equity index annuity sales we feel that our position needs to be clarified. While Annuity IQ likes annuities, immediate, traditional fixed and specifically variable annuities we do feel that equity index annuities have little place for most investors. Below we will further explain our position.

Surrender Schedule:

While the annuity surrender schedule needs to be taken into consideration it must not be the only litmus test for any investment. if the surrender schedule fits the needs of the investor then it is a non-issue. However, some contracts should not be available to older, say above the age of 70, for some clients, specifically surrender schedules that surpass 10 years.

While there is liquidity for most annuity products while they are in the surrender period we feel that contracts that have surrender schedules longer than 10 years is a bit excessive.This is especially true for investors who are older than 70 as the contract will not mature until they are at least 80. Also, with contracts with surrender schedules longer than 10 years we often see the first few years penalty, above the free out amount, in excess of 10% which would invade principal.

Caps:

A cap is set by the insurance company and it dictates the maximum amount the contract owner may recieve in any particular year. If the annual cap is 10%, for example, then the investor will never see more than a 10% gain for that year, even if the index the annuity is pegged to sees returns of much higher. This is a way for the insurance company to hedge its risk and to make a profit from the product, that is not a bad thing by the way.

Most of the popular equity index annuity products have caps, either annual, monthly or for the term of the contract. These caps can move on an annual basis and many caps that start out high often move lower on contract anniversaries the longer the contract is held. That is not to say the caps will always go down, but like fixed annuities that seems to be the trend.

Bonus:

Many of the popular equity index annuities have bonuses attached to them to entice investors. The bonus will be credited to the purchase payment amount and can be as high as 16%. While these bonuses seem attractive one has to ask himself why the insurance company would give someone a 16% bump for money invested.

The answer is because it is highly profitable for the insurance company. While they pay you that huge bonus they often times have a vesting schedule and very long surrender schedules. There may also be lower caps, a spread (where the insurance company will take a certain percentage of the earnings) or some other fee attached to it.

Some of the more disturbing things about these miracle 16% products is the fact that the insurance company may force you to annuitize the contract after the surrender schedule in order to realize the benefits of the bonus and the earnings in the contract. While annuitization can be a good thing, forced annuitization is not. Also if the contract has a 10 year surrender schedule and you have to annuitize the contract you could own this product for a very long time or forever.

Monthly Averaging:

Monthly averaging is where the insurance company will average the previous 12 months returns for the index the annuity is pegged against in order to determine your rate of return. Monthly averaging will reduce your rate of return, it says this right in the sales material. Some people pitch the monthly averaging as a way to reduce volatility, but that is not true, it only reduces what you will earn.

If you combine monthly averaging with a cap or a spread then your return will be severely reduced, that is a mathematical fact. if the contract offers a point-to-point annual ratchet chances are it will be better for the investor.

Dividends of The Index:

Many of the popular equity index annuities sold have their rate of return pegged to the S&P 500. The problem is that about 35 - 40% of the S&P 500’s rate of return is derived from dividends and, to our knowledge, no equity index product in the market includes dividends in their returns. The reason that dividends are not included is because the insurance carrier buys options on the S&P 500 and does not actually own the index and options do not include dividends.

This means that the investor is already starting out behind the eight ball. If dividends are not included, there is a cap and monthly averaging then the rate of return may only be slightly better than a fixed annuity product.

All of these moving parts individually put the investor at a loss, but combined it proves the product to be ineffective. While there are some great equity index products available they are not always sought after. Generally the better products pay less commission versus the bad products that usually pay higher commissions.

Odds are that the products being attacked by Dateline are the bad higher commission paying products, but they never actually showed what exact product was being singled out. That is the real problem, the media never truly identifies the product that is the worst and they simply group all products in the same class.

While we do not like equity index annuities and think the Dateline story had some merits, we also feel that they did not show any of the positive things that the product can do. The good products are hard to find, but they do exist and one must do their own research to find the best product for their needs.