EIA's

9 replies [Last post]
scrim67's picture
Offline
Joined: 2005-04-28

About seven years ago, before I became an advisor, my parents bought an equity index annuity.
At my firm, we aren't even allowed to touch these products as they seem extremely convoluted at best, shady at worst.
These products just don't pass the smell test for me but how can I succintly explain this so my parent's can understand why they should eventually surrender this policy.
In my own research, I know they aren't usually the best choice for risk adverse clientele.  A CD or money market is probably a better choice then an EIA.    The contracts seem to be filled with double speak and gabbely gook.
For those veterans out there I have one question.  
"Are they really as bad as they seem?"
Please cut thru the haze for me and enlighten me so I may pass this along to mom and dad.
scrim

doberman's picture
Offline
Joined: 2005-02-22

What I would do: Read over the policy, especially the fine print. Tell your parents (in plain english) how it really works. Then give them best case and worst case scenarios on what the EIA will do if the market goes down, stays the same, or goes up. Then let them decide what to do.
Just my 2 cents.

FreedomLvr's picture
Offline
Joined: 2006-02-10

Totally depends on the product.  I think some are very competitive and have seen clients return over 10% in a year.  Some are so restrictive and leave the insurance company with so much control I wouldn't sell one to my worst enemy (well, maybe my worst enemy).  Some things to look for:
Surrender period, surrender charges, MVA, pcrediting method (annual, monthly, averaging, pt-pt?), participation rate (minimum, maximum, and current), fee (min, max, cur), cap (min, max, cur), free withdrawal provision, minimum guarantee, carrier rating, average annual return since inception.
If she bought it in 1999 she probably had 3 flat years followed by some growth.  I've researched these things before, PM me with the details and I'll review it with you if you want.

Soothsayer's picture
Offline
Joined: 2005-02-24

I'm guessing that your parents are adults.  Adults understand that if something sounds to good to be true, then it probably is.  There is no free lunch in financial services.  (Even if the guy who sold your parents the EIA bought theirs.) 
I usually explain to clients that there is a floor to the market.  That floor is zero.  The upside is unlimited (in theory).  The insurance company flips that paradigm.  They essentially cap the upside, while limiting the downside (to no loss of principla).  A living benefit with a guarantee still allows you all of the upside (where the real growth opportunity still remains), if you can accept some amount of downside. 
If you can't accept any element of downside, then you don't belong in the market in the first place.  Now, go make some commish off Mom & Dad! 

dude's picture
Offline
Joined: 2005-11-15

EIA's can be financial suicide or a decent, conservative investment. 
Scrim,
What you want to look for:
1)  What kind of crediting method eg. annual point to point, monthly point to point (aka monthly sum), monthly average, daily averaging annual, biannual etc.......
2)  Is there a participation rate and if, what is it ( 65%, 70% etc...)?
     a)  What is the current, maximum and minimum participation rate?
          -Essentially it is a cap and a floor on the participation rate
3)  Is there a spread and if, what is it (8, 9, 10)?
     a)  this is subtracted as a percentage off of the return.
4)  Is there a cap and if, what is it?  This is usually expressed as 7% to 12%
~This will give you a start on understanding how the interest is calculated.  Keep in mind the average EIA has returned between 6% and 8% annually over the last 10 years, not too shabby considering there is a principal guarantee.  My big problem with EIA's is how they are marketed.  They are sometimes marketed as providing 'stock market returns', which is a bit misleading.  They should be viewed as a fixed income type product that has the potential of providing more growth than a traditional fixed annuity. 
~I have come to the conclusion that monthly point to point with a cap of no less that 3% is about the best crediting method, since it can hypothetically provide 30% plus returns in a year (although each crediting method has it's benefits and downfalls).  Most hypotheticals I've ran have shown 1% to 2% more return annually on monthly point accounts. 
Annual Point to point with 100% participation and a cap of 10% to 12% would be another decent crediting methods.  Both choices are preferred mainly because their simplicity in arriving at the return, in addition to giving the best opportunity for a good return.
*  This is just a start.....if your parents have one of those convoluted annuities that have a hieroglyphics chart describing their crediting methods then I'd begin to get a little worried.  If you want some more help I'd be glad to assist you, either post back or PM me.
Good luck

anonymous's picture
Offline
Joined: 2005-09-29

Scrim, an EIA is nothing more than a fixed annuity with a different crediting method.  Ultimately, it may return more or less than other fixed annuities. 
If a fixed annuity is appropriate for your parents, the EIA is probably fine.  They tend to pay high commissions which is what necessitates surrender charges for a long period of time.
I don't find the products to be shady.  I do find the typical selling method to be shady.
Over these past 7 years, I'm sure that the perfomance of the EIA blew away what they would have achieved in CDs and money markets.
I'm not a fan of EIAs, but they aren't evil.  If your folks are using this for a conservative part of their portfolio, moving the money is probably not a good move.

knucklehead's picture
Offline
Joined: 2006-07-27

scrim67 wrote:
At my firm, we aren't even allowed to touch these products as they seem extremely convoluted at best, shady at worst.
scrim

This is not why you aren't allowed to sell them. It's because over the length of the surrender period, they will make more money off of the assets if they stay in-house. They've done a good job in making one of their chumps (you) believe that they are somewhere between convoluted and shady. Does your firm sell mutual funds? THose are much more convoluted and shady than EIA's.

scrim67's picture
Offline
Joined: 2005-04-28

knucklehead wrote:scrim67 wrote:
At my firm, we aren't even allowed to touch these products as they seem extremely convoluted at best, shady at worst.
scrim

This is not why you aren't allowed to sell them. It's because over the length of the surrender period, they will make more money off of the assets if they stay in-house. They've done a good job in making one of their chumps (you) believe that they are somewhere between convoluted and shady. Does your firm sell mutual funds? THose are much more convoluted and shady than EIA's.

I will have to respectfully disagree with you on that statement albeit some mutual funds companies are no angels.
Certainly less convoluted, can't argue that even taking into account some of the hidden costs of MF's.
scrim

knucklehead's picture
Offline
Joined: 2006-07-27

scrim67 wrote:knucklehead wrote:scrim67 wrote:
At my firm, we aren't even allowed to touch these products as they seem extremely convoluted at best, shady at worst.
scrim

This is not why you aren't allowed to sell them. It's because over the length of the surrender period, they will make more money off of the assets if they stay in-house. They've done a good job in making one of their chumps (you) believe that they are somewhere between convoluted and shady. Does your firm sell mutual funds? THose are much more convoluted and shady than EIA's.

I will have to respectfully disagree with you on that statement albeit some mutual funds companies are no angels.
Certainly less convoluted, can't argue that even taking into account some of the hidden costs of MF's.
scrim

You can look in an EIA prospectus and see exactly how it works. You can't look in a MF prospectus and see which stocks they're gonna buy/sell, at what price and on what day. Nor do you know what the CG distributions are gonna be or what the divs are. I won't even mention the additional costs that DON'T have to go in the prospectus. Pretty convoluted, ain't it?

dude's picture
Offline
Joined: 2005-11-15

knucklehead wrote:scrim67 wrote:knucklehead wrote:scrim67 wrote:
At my firm, we aren't even allowed to touch these products as they seem extremely convoluted at best, shady at worst.
scrim

This is not why you aren't allowed to sell them. It's because over the length of the surrender period, they will make more money off of the assets if they stay in-house. They've done a good job in making one of their chumps (you) believe that they are somewhere between convoluted and shady. Does your firm sell mutual funds? THose are much more convoluted and shady than EIA's.

I will have to respectfully disagree with you on that statement albeit some mutual funds companies are no angels.
Certainly less convoluted, can't argue that even taking into account some of the hidden costs of MF's.
scrim

You can look in an EIA prospectus and see exactly how it works. You can't look in a MF prospectus and see which stocks they're gonna buy/sell, at what price and on what day. Nor do you know what the CG distributions are gonna be or what the divs are. I won't even mention the additional costs that DON'T have to go in the prospectus. Pretty convoluted, ain't it?

Scrim,
knucklehead has a good point here.  Good EIA's are really not that 'convoluted'.  I used to hate EIA's, mainly because the ones I saw that client's owned and the ones offered by my b/d were convoluted and not that great, in addition to the sometimes deceptive marketing.  There are definitely EIA's that are appropriate investments.  As long as they have a fair crediting method, I would expect a good EIA to earn between 6% and 8% longer term. 

Please or Register to post comments.

Industry Newsletters
Investment Category Sponsor Links

 

Careers Category Sponsor Links

Sponsored Introduction Continue on to (or wait seconds) ×