LOCAL VOICES: Setting record straight on annunities

By BILL SMITH Sandusky investment counselor Sue
Sandusky Register Staff
May 24, 2010



Sandusky investment counselor

Sue Daugherty's Aug. 14 column on Equity Indexed Annuities (proper name: Fixed Indexed Annuities) was a misrepresentation of the product and grossly skewed, as the points used by Ms. Daugherty to support her opinion on FIAs were misstated and incomplete.

A Fixed Indexed Annuity is nothing more than a contract with an insurance company. The interest earned on an FIA can be higher than any comparable "safe money" product such as CDs, government bonds and traditional fixed annuities, and is typically credited on an annual basis. The amount of interest earned is directly correlated to whichever major stock or bond index it's linked to, for example the S&P 500ª or Dow Jones. Once the interest is credited, it's locked in and the policy holder can NOT lose the interest earned. Ms. Daugherty misstated the "term period" or annuity contract period of an FIA, as a term can actually be as short as 3 years or as long as 25, depending on the needs of the client. Once mature, most products allow for account distributions to be taken as one lump sum without a penalty. If the policy holder chooses the lifetime distribution option for their FIA and lives beyond their calculated life expectancy, the insurance company will continue to pay the same monthly distribution for the rest of the policy holder's life. The product is intended for use in retirement, and is suitable for those individuals who do NOT need access to more than 10 percent of their account value each year. Some variations of the product even come with a checkbook, allowing for easy account access. A FIA can be part of a long-term plan, and when correctly used, offers benefits such as no loss of principal, triple compounding of interest and potentially higher rates of return than other safe money options. FIAs can also be a valuable tool for income planning. Some FIA accounts offer Income Riders that will guarantee that the policy holder's money will grow at rates between five and eight percent for future income needs.

In the third paragraph, about insurance companies that offer FIAs, Ms. Daugherty states, "... the money is only guaranteed as long as the insurance company remains in business." To question the stability of insurance companies is comical. A. M. Best Co., an independent third party evaluator of the insurance industry, founded in 1899, rates insurance companies based on financial strength, credit rating and debt rating. The S & P also rates insurance companies by the same standards. The ten most common FIA providers rate either an A+, A, or an A- proving the insurance industry as one of the most stable industries in our country today.

In the beginning of the fourth paragraph, Ms. Daugherty misquotes the Ohio Department of Insurance, stating "The Ohio Department of Insurance Web site describes an equity indexed annuity best when it says ' ...senior will not likely benefit from the product during their lifetime, and where they cannot withdraw the funds early without paying a penalty. Ohio law requires agents and companies to assure annuities sold to Ohioans are suitable for the policyholder, based on their age, income and other needs.'" The actual quote from the Ohio Department of Insurance's Web site reads, "Certain insurance agents have been found to have sold annuities to seniors where the senior will not likely benefit from the product during their lifetime, and where they cannot withdraw the funds early without paying a penalty..." and so on. The latter (and complete) statement refers to certain agents' sales practices and not the FIA product itself. The quote in the column was misleading and taken out of context to support her unsubstantiated claims.

As with any industry or service, the buyer must beware and do their homework before committing to any product or professional. Today's consumers have infinite resources available, giving them the ability to check the background of their selected financial advisor, the validity of the product they are considering, the rating of the company providing the product, and so on. FIAs are not suitable for everyone but valuable for many, and a person's age, financial status, income needs, and long-term goals should be assessed before committing to this or any financial product.

Ms. Daugherty provided misinformation to support her own opinion. Unfortunately, there is a lot of misinformation about personal finance topics. It is up to you to do the research to determine if any recommended financial product or strategy is right for you and your particular situation.