My point is that I believe that the EIA is a product invented for the purpose of giving insurance salspeople an opportunity to sell in the stock market(albeit indirectly) without a license. I know I've read some articles by various regulating authorities that are raising similar questions(don't ask me to cut and paste, please). I also have a problem with the fact that the EIA doesn't actually hold the securities. I am not as comfortable holding an agreement that says I have a right to the gain that a security,held somewhere else, may achieve. I would rather hold the security myself. With any leverage used at the ins. co. you could end up with nothing, and no recourse. Now, I'm really not here to argue, I'm here to learn. If I'm mistaken, then show me.

So if the insurance company uses leverage and goes belly up, your client gets all of the money in the VA?  What is your recourse then?

The fact that the VA holds the securities doesn't mean your client owns them.  You client owns a contract.  Just like with an EIA.  They are both insurance contracts.

Nonsense. Securities in th VA are held in a seperate account. Ins Co goes belly up, you still own the securities in your account. And the state ins commish will be another means of security. If the security in a VA is suspect, than any mutual fund anywhere is suspect.

[quote=navet]

Nonsense. Securities in th VA are held in a seperate account. Ins Co goes belly up, you still own the securities in your account. And the state ins commish will be another means of security. If the security in a VA is suspect, than any mutual fund anywhere is suspect.

[/quote]

Are you serious?  Question:  Are the mutual funds in the subaccounts the same as if it was not inside an annuity?

Those subaccounts function "like a mutual fund", but aren't actually mutual funds.  Also, your argument is for guaranteed income.  But the guarantee is removed if the insurance company goes belly up.  And if the insurance company goes belly up, it is likely that any mutual funds are tanking as well.

Also, the insurance company separate account belongs to the Insurance company. 

I may be wrong about VAs and that you will get the mutual funds if the insurance company goes belly up, but even if that's true, who cares?  If you are doing your due diligence, the insurance company likely won't go bankrupt, and you'll be good to go.

Same with EIAs.  I don't know how long you've been with Jones, but did you know that Jones used to be anti-VA?  Wake up! 

He's actually correct, according to the wholesalers I've asked, on the subaccount issue.  Hartford goes belly up on the insurance side, their mutual funds/sub accounts could survive.  You lose the income guarantees from them, but your $$ is still there.

navet - Here's where I could see using an EIA.  I've got a client who is 70 years old.  She has plenty of income for the rest of her life, inflation included.  Her essential needs are met with that income.  She uninsurable.  She'd like to pass money more money on to her kids than what she has right now.  Fixed annuity rates suck right now and you have to renew then when the contract renews or the insurance company says bend over on the renewal rate.  She doesn't want something aggressive like CAIBX or ABALX, but she'd still like to participate in the growth of the market.  But she's terrified that it'll go down 45% again like 2008.  What do you put her in? 

I can see making an argument for an EIA that participates (albeit not 100%) with the returns of the S&P on the upside and earns 2-3% in the down years.  Just like a fixed annuity, the account balance is always going up.  Sidebar - if your clients who liked the VA in 2008 would have purchased a Fixed annuity back then, they would have ended up with a very similar amount of $$ to pull income off of.  Except that it would have been principal, not income benefit.  Real $$.  OK, back to my 70 yr old.  She gets to reinvest, is protected from the market, but yet gets to grow when the market does.  Sure, there could be some very big downsides, but for a 70 year old that simply wants to grow her $$ better than a fixed annuity, some guys would say an EIA is a great option. 

The problem is that some folks think that EVERYONE needs to own an EIA.  And there are some horrible ones out there.  And if you think explaining income benefits is tough, try explaining point to point indexing or some of the more exotic indexing structures that some companies use. 

It's one solution that doesn't fit everyone.  But there are going to be some situations where it could be a very viable option. 

[quote=Spaceman Spiff]

He's actually correct, according to the wholesalers I've asked, on the subaccount issue.  Hartford goes belly up on the insurance side, their mutual funds/sub accounts could survive.  You lose the income guarantees from them, but your $$ is still there.

navet - Here's where I could see using an EIA.  I've got a client who is 70 years old.  She has plenty of income for the rest of her life, inflation included.  Her essential needs are met with that income.  She uninsurable.  She'd like to pass money more money on to her kids than what she has right now.  Fixed annuity rates suck right now and you have to renew then when the contract renews or the insurance company says bend over on the renewal rate.  She doesn't want something aggressive like CAIBX or ABALX, but she'd still like to participate in the growth of the market.  But she's terrified that it'll go down 45% again like 2008.  What do you put her in? 

I can see making an argument for an EIA that participates (albeit not 100%) with the returns of the S&P on the upside and earns 2-3% in the down years.  Just like a fixed annuity, the account balance is always going up.  Sidebar - if your clients who liked the VA in 2008 would have purchased a Fixed annuity back then, they would have ended up with a very similar amount of $$ to pull income off of.  Except that it would have been principal, not income benefit.  Real $$.  OK, back to my 70 yr old.  She gets to reinvest, is protected from the market, but yet gets to grow when the market does.  Sure, there could be some very big downsides, but for a 70 year old that simply wants to grow her $$ better than a fixed annuity, some guys would say an EIA is a great option. 

The problem is that some folks think that EVERYONE needs to own an EIA.  And there are some horrible ones out there.  And if you think explaining income benefits is tough, try explaining point to point indexing or some of the more exotic indexing structures that some companies use. 

It's one solution that doesn't fit everyone.  But there are going to be some situations where it could be a very viable option. 

[/quote]

There you go!!  Just like VA's there are armpit stinky EIA's as well.  The fact that there are contracts out there offering 10-12% surrender periods and paying the salesman 10% is why the insurance products all get a bad rap.  Since an EIA goes further and lets a broader sales force (no series X whatsoever) and have mind boggling return structures (all togehter lending to more abuse), they get an even worse rap. 

I stand corrected then.  Thanks Spiff.  This is why I leave insurance products to people who are EXPERTS.  Not someone who thinks they may know something.

I know just enough to get somebody in the wrong product.  But I'll outperform those mutual funds ALL DAY!

[quote=navet]If EIA's are so great, then tell me why. Jones doesn't sell them, but that isn't exactly a death sentence on the product. My issue is that they top out before the market does, they don't actually own the assets(equities), and there have been several negative articles by a number of respected pubs.[/quote]

Ha ha--Jones is the final authority on what is good to sell!!???  I will call Jones before I have my next client meeting.

By the way, something that looks very attractive right now for someone who needs income later would  be zero coupon muni bonds.  Most people think rates will be higher in a few years so buy a zero muni now and then have more principal to invest at higher rates later.

To address a few questions asked earlier.

Someone asked "how many moving parts are in that EIA?"   On the particular one refenced, there are none.  The rates are set whent he contract is issued.  You do pay for that though becase moving parts generally provide a better value to the client because they move with the options pricing. 

It was also asked, "who owns the equities in an EIA?"  First things first, generally, an "equity indexed annuity" or, more properly, a fixed indexed annuity, is not comprised of equities in the index they track.  They are primarily bond based investments with that use options create their correlation to an index.

To better explain how they work, let's start with a typical fixed annuity.  An insurance company has their investment account primarily composed of high quality bonds.  It has a certain yield from which the insurance company takes their spread and pays a fixed rate of return the the policy owner.  A fixed indexed annuity or EIA works very similarly.

Interest is earned on the investment account of the insurance company.  Now, instead of paying a fixed rate of return, options are purchased with the interest to track the equity index that a particular product will follow.  So, say the insurance company's investment account earns 6%.  They would take 2% for themselves and pay 4% out in a fixed annuity.  In the indexed annuity, they take the 4% and buy options.  Buying options like this on an intituational level gives them purchasing power the ordinary investor never has.  It's a strategy that is difficult to replicate on your own.

What it does give is safety of prinicpal, opportunity for growth above that of other fixed investments, tax deferral, and numerous income options.  Like many other investment choices, there are good and bad ones.  They are not for everyone and need to be used suitably - just as any other recommendation should be. 

Now, I'm sure I've come across as an indexed annuity shill.  I want to mention that I'm a big believer in MPT, and don't think indexed annuities are for everyone.  However, it bothers me to see so much misinformation about a product that I've used and been thanked repeated for using by my clients - particulary those nearing or in retirement that can't afford losses.  I just view them as another tool on my belt for the right situations when building a balanced portfolio.

That would be me.  If you are implying that moving parts are baked into the contract for the benefit of the client you are either a) a lying tool; or b) a woefully ignorant tool.  If you can present me with an 8% guarantee from a reputable company with no moving parts and decent participation rates and surrender period, I would put some of my own money into that.

Man on the Couch:  I guess what I don't understand is if the bonds are yielding 6%, the Ins Co takes 2%, and 4% purchases options, where do they get the guaranteed floor rate when the market is negative (ie. the options are worthless)?

I grossly simplified the example.  The 4% is sliced up numerous ways by the actuaries to provide the benefits they think will sell.  This can include additional liquidity provisions, higher fixed accounts, higher minimum guarantees.  The bottom line is that the pie is limited in size and split to create competitve products.  So, there's a lot of give and take with various annuities.  For example, higher minimum guarantees will often provide lower caps and less liquidity.  In almost all cases the minimum guarantees are never paid because the indexed annuity will perform well enough to avoid it.  They're usually just marketing. 

For more technical and historical information, check out the Advantage Compendium website run by Jack Marrion.  They have tracked almost all the technical data on indexed annuities.

joelv - there are certain products where the rates are set and baked into them - never to change.  To protect themselves, the insurance companies will set these terms with greater margin for error to protect their profit.  By using moving parts, the margin can continuously be kept narrower.  In both cases, the insurance company is protecting itself, however, when you have static terms, they must build in a greater margin for error.

The S&P hit a bottom on 5/25/1970 around 69

It struggled around for ~4.5 years then hit another bottom on 10/03/1974 around 62

You know what the next 30 years were like...

The S&P hit a bottom on 10/09/2002 around 776

It struggled around for ~6.5 years then hit another bottom on 3/09/2009 around 676 (666 intrady)

Where do you want to be in 3, 5, 10 years? If it is an annuity, fine. If it is directly in the market, good. Jump in and swim or head back to the house. Looking back, you will be glad you did...