What is The Deal With Income Replacement Funds?

The hottest trend for investment firms is planning for income distribution for the Baby Boomers. As the Boomers age they are seeking investments that will provide income for their retirement needs. The insurance industry has had a lock on the guaranteed income angle for the better part of 200 years through annuities.

Now, mutual fund firms are trying to get in on the action. The hottest trend, besides ETF’s, are income replacement funds which will allocate the investors money and then start to pay a stream of income after a set number of years. The income is derived from income paying securities, dividends and good old fashion withdrawals. The big question is will these products work?

Well the jury is out because all of these products are brand new and have zero track record. With the existing strategies it seems feasible that they will work if the market only goes up and interest rates increase, but then again all investments look good in that scenario. The truth is only time will tell.

They can as part of a diversified portfolio, but not as a stand alone solution. Like investing at any point in a persons life diversification is key and having guaranteed income mixed in with mutual funds can make perfect sense. In a recent article a person from Morningstar was even quoted as saying that for guaranteed income the variable annuity, with living benefits, makes much more sense than just income replacement funds.

While some annuities are less than appealing, EIA’s for example…huh, hum, Steve, a variable annuity with a living benefit can provide guaranteed income along with inflation protection by keeping money invested in equities. As with any type of investment a variable annuity should be considered an asset class and not as a stand alone solution. By using mutual funds and an Annuity the investor will reduce their risk and improve long term returns, Ibbotson has proven this.

The only thing is how do you know what variable annuity is good and which ones are below par? Sign-up for Annuity IQ to find out.

Sphere: Related Content

More Training for Equity Index Annuity Producers in Iowa

In response to multiple lawsuits filed by 8 states, with more states likely to follow suit, Iowa’s insurance division has issued a new set of rules for equity index annuity producers. Now, in order to sell EIA products in Iowa the producer will have to complete a class covering suitability and other issues EIA’s may bring to the table. The producer must complete this new class by January 1^st 2008.

This is fairly interesting because the course that the producers have to take will cover the features and benefits available on equity index annuities. It will also cover the basics such as early withdrawals, surrender charges and the advantages and disadvantages of the product.

Now, this sounds like a good idea, but how stupid do you think people who sell equity index annuities are? Producers, generally speaking, know how annuities work and how the benefits work and most know these basic things about EIA’s because most annuities work the same way. The only thing different are that they will, apparently, show producers how certain benefits work.

This is a very weak attempt to say it is not the products that are the problem, but it is the producers that are the problem. I hate EIA products, but even I know there are some good ones out there and I know it is not the agent who is usually at fault, it is the products basic design. If you foresee a problem and you want to nip it in the bud, so to speak, early why not make the insurance carriers deliver a product that is actually user friendly?

Seriously, if I were an EIA producer I would be very upset over these new rules. Why you ask? Simple, every adviser knows continuing education is a joke and you learn very little from it. This is the same thing and it addresses only the agents, not the real problem which is the product itself. This class is another way the state can cover its self and collect more fees from EIA producers and does nothing to address the actual problem.

We know there is a problem in the industry so address it. Get rid of two tiered annuities and ridiculous bonus products and many of the moving parts found in EIA’s. The state insurance supervisor has control over what is approved in his/her state, so fix it that way!

Sphere: Related Content

Equity Index Annuities

Now, as many of you already know I am no fan of equity index annuities as most of them are big on promise, but short on delivery. I also cannot believe I am going to utter these words, but I just got done reading an article from my favorite Mr. Burns titled; “Equity Index Annuities Fall Short” and I agree with him. To be perfectly clear, I hate index annuities and I think the vast majority of the products are very bad for investors.

Not because it was an anti-equity index annuity, but because everything he wrote was true. In my own comparison on these products I found only one that performed well over the long term. All of the more widely sold products performed pretty badly and those popular products happen to pay the highest commission.

The numbers do not lie and he used real studies to show that the average rates of return on these products are on par with traditional fixed annuities. The problem with EIA’s is the fact that they have so many moving parts and the insurance carrier can change the caps every year. This means you have no idea what your cap is going to be year over year. That is the biggest problem, but not the only problem.

The surrender schedule is usually way too long and the commissions, some of which can be as high as 14%, are high. There is simply too many benefits for the agent and not enough benefits for the consumer. You would be much better investing into a variable annuity with a living benefit or into a traditional fixed annuity instead of an EIA. Do not get me wrong, not all equity index annuities are bad, but most are.

The biggest problem I have with these products is you have people making outrageous claims about the product. Need I remind you of this:

equity index annuities scott burns annuity variable annuity Sphere: Related Content

Allianz Lawsuit Goes To Class Action

In the annuity world there are traps and pitfalls, this is not news though. What is news is that Allianz will finally be called out on their sales practices and product line. In my opinion, it is about time.

Not all of Allianz’s products are bad, but their most popular products are. Typically, their popular annuities are structured like this, low rate of return, long surrender schedules, forced annuitization and they pay high commissions to the agents selling them.

Being an annuity lover, these products have always left a bad taste in my mouth because they simply do not deliver the promises they say they will. I know many people love EIA’s and that is fine because there are some good ones out there.

With that being said, how can anyone say that a product that offers a 10% bonus, has a 10 year surrender schedule and you have to annuitize it to realize the products gains is a solid investment? In some situations it may be good, but not at the levels Allianz was selling this product at.

Does the lawsuit have merit? In short, yes it does. Do I agree with the attorneys claims? No, not all of them. Allianz has been a powerful figure in the IMO, insurance marketing organizations, for years now. They have a dedicated IMO based in San Diego, California that specializes in helping you sell more Allianz products, to seniors especially. This, I am sure, will all come out in the lawsuit.

Now, the attorneys say that seniors should never buy a deferred annuity because of surrender schedules and liquidity. They are partially right, a senior should not buy an Annuity if they will need access to more than 10% of their investment. Long surrender contracts, over 7 years, should be the main thrust of the lawsuit not all annuity surrender schedules.

To put all annuities at the same level as these products Allianz is being sued over is incredulous. There is a vast difference between an equity index annuity, a variable annuity and a fixed Annuity. They all work differently and should never be compared to each other as equals.

Anyhow, the question at hand is can Allianz win? I will predict they will not, but either will the clients. As with most class action lawsuits the real winners will be the attorneys and the people who actually got hurt will receive very little.

A good example of a class action lawsuit is the Google click fraud settlement. Google was sued over not identifying people intentionally clicking ads and it cost advertisers millions upon millions of dollars in fraudulent clicks. Google settled for 90 million, or so, but the attorneys received 30 million in fees. The people who got hurt only received a few dollars in the settlement….I should have been a lawyer, but, unfortunately, I have a soul I wish to keep.

Allianz will probably not win because the plaintiff’s attorneys will parade hundreds, if necessary, of elderly people who were sold these annuities. No jury in the world will disregard people that are probably their grandparent’s age. The tragedy is people did get hurt by these products, but they will see little return from this upcoming long process they will have to endure.

Equity index annuities are a tough and complex game with many moving parts. Great care should be made when recommending these products. Any annuity that can afford to pay the agent a 10% commission and the client a 10% bonus cannot be good for the client, as they will have to pay for the insurance carrier’s generosity at the end of the day.

equity index annuity annuity annuities eia Sphere: Related Content

Wow…13.68%, Guaranteed!

I love the internet you can find anything you want on the net. Unfortunately, many people will probably fall for this ad.

Just tell us Tony, it’s an EQUITY INDEX annuity! I can tell you for a fact that wealth strategists do not invest much, if any, of their wealthier clients money in equity index annuities. I signed up for his ‘special report’ and it is just a joke. He does not even call the product what it is. Instead he calls it ‘indexing’ instead on index Annuity.

Basically, to get the 13.68% guarantee he is talking about you would buy a 10% bonus EIA and put the money into the money market account for the first year. After that he would invest it into the index side of the annuity where it will track the S&P 500 or a similar index.

Again, he fails to tell you about the steep deferred sales charges that last for 10 years. He also fails to tell you about the fact that you will have to annuitize the contract to receive the full contract value. I mean, come on, these are the same products that Minnesota and other attorney generals are suing insurance carriers over.

I love annuities, as you all know, but this is ridiculous and this is a product that can cause severe damage to peoples futures. Every product has its place, but I fail to see how this ‘wonder’ product will actually help many people. I have to side with the media and critics on these products, they stink.

eia equity index annuity annuity annuities Sphere: Related Content