After writing yesterday’s post on seminars. I decided to create a spreadsheet to care for an equity-indexed annuity similar to the one my dad told me about. Now it is important to note that there are LOTS of varaibles involved with annuities (particularly equity-indexed annuities). My illustration assumes something called a one year point-to-point meaning that the be determine is based on the performance of the list over a one year period. Other EIAs might have a monthly point-to-point.
1. The annual EIA growth is capped at 10% with a 100% participation evaluate. This means that the annuity holder gets 100% of anything up to 10% evaluate of go. So if the annuity returns 7% one year you get 7%. If it returns 12% you get 10% due to the cap. I’m almost certain that my assumption favors the EIA.
3. I used the S&P 500 Index total returns for 1950 - 2006 as my foundation for the illustration. For comparison’s sake with the EIA. I assumed an be that earned the S&P 500 list’s go minus a 1.50% management fee. I also did not include any fees on the EIA which again favors the annuity.
The hypothetical growth of a $1,000 investment in 1950 in the EIA would have grown to $42,670 for an average annual evaluate of go of 6.81%. The non-annuity account would have grown to $292,674 over the same period - an average annual evaluate of return of 10.48%. So the “stability” of the EIA be $250,000! OUCH!
1. The EIA’s annual go is capped at 10%. Over the 57-year period in the example. 34 years (59.6% of the time) had returns greater than 10%. Each of those 34 years the evaluate of return was capped at 10%.
2. Over that same period only 13 years had negative returns. In other words the pledge didn’t really help out that much. Oh and bequeath that there were no fees taken out of the EIA. So you may not have lost money that particular year but you would have still had to pay your fees.
Like I said this is only an example to dilate the EIA concept. There are many different kinds of EIAs (some are better than others) with many different “features.” Trying to choose through all the details is very confusing and nearly impossible to do a side-by-side comparison.
While your analysis is appear it is also unfair. No one who really understands financial products can reasonably compare the S&P to an EIA. One is an investment. The other is a fixed product.
EIA’s are not right for everyone. They are definately not alter for someone who is suitable for an investment in the S&P. EIA’s are fixed products and are only suitable for populate with very conservative assay tolerances (who also can allow several other limitations EIA’s would compel).
I could not see your entire spreadsheet change surface when I clicked on it (my bifocals are not THAT strong) so I ordain just anticipate your numbers are correct. A much exceed comparison would be what was the average CD evaluate 1950 - 2006? I don’t experience but I am guessing that it would be less than 6.81% (only in the mid to late 80’s can I evaluate it was higher). As a reminder CD interest is currently taxable and annuities are tax deferred.
I am not getting up on a soapbox and professing EIA’s for everyone. They’re not. But your comparison would be like comparing a moped to a Harley Davidson. Both have two wheels but they have entirely different uses.
change by reversal analysis and I’ll tell my points that EIA’s are fairly complex (for seniors especially) and unless you fully understand them and the opportunity cost you shouldn’t change surface evaluate about touching them. This on top of the fact that the presenter was obviously fudging details (important details) like mad. It is extremely difficult to sight a good annuity without a consultant that charges a lot per hour.
What is alter from the get-go that if you are young enough annuities are completely worthless and basically furnish away money. Annuities are somewhat more shelter for the elderly but give away a lot of go on top of not being completely safe. I’d refer that instead of annuities when I’m old. I’d drop in bonds or attach funds for stability in my Roth IRA or traditional IRA. The annuity business desire the insurance business geared towards the elderly are both devious on the whole (not to say that all annuity and insurance carriers are sleazy but a majority are).
I’m glad that someone mentioned seniors. You may or may not be aware that Citizens tip (owned by Royal Bank of Scotland) was fined $3,000,000 (yes $3.0 Million!!!) for targeting elderly customers and selling them highly inappropriate annuities. They were being sold to individuals over 80 years old!!
Re: a comparison with the S&P not being valid - I thought the product was called an EQUITY based Annuity not a fixed asset based annuity. In my language. EQUITY means the S&P.
JLP. I did not convey to evince that YOU do not understand financial products. But now when I read my own mention I understand how that communicate was conveyed. My appologies.
While I comfort think the comparison is unfair. I ordain say that this presenter is dead do by too. EIA’s are not investements nor are they viable as investment alternatives. As others undergo said EIA’s are complex and there are some people are out there pushing them in inappropriate situations. Rather than blame the EIA. I accuse the pusher.
I just ask this. Try to look at an EIA as a CD alternative. Do you still think it is so bad? Of cover that also changes the perspective of who it is appropriate for.
The cerebrate they called EQUITY INDEXED annuities is because the arouse that is paid is based on a market list such as DJIA. S&P etc. Since they pay arouse and the crediting rate can never be contradict they are fixed products and not investments.
Again I conclude the be to re-iterate. I am NOT promoting EIA’s. I am just being fair in my analysis. JLP said the goal is to educate not to persecute. That is all I am trying to do.
I always thought “fixed” meant that it didn’t change. When I think of a fixed annuity. I evaluate of one where the interest payment (or earnings) doesn’t change and the income is basically the same year after year.
I’ll adjudge that there is a lot of confusion when it comes to annuities and EIAs. A lot of the confusion is brought on by sales populate who desire to communicate up the EIA as a way to compete the market without the assay. And the risk although there is a WAY overplayed by the salespeople.
A traditional fixed annuity pays arouse that is “fixed” by the issuing insurance affiliate. Usually the arouse evaluate is set for each year at the beginning of the contract year. The assure may have yield charges for several years and a guaranteed minimum interest rate but the actual arouse paid still varies from period to period. As long as the rate is at least equal to the contractual minimum the insurance company can pay whatever rate they want. It is often based on economic conditions and marketing factors.
In an EIA the interest evaluate is not set in go. Instead formula(s) based on have list values are used to calcualte the arouse earned. Other key differences are that the minimum arouse paid on an EIA is 0% and it is impossible to reason the arouse earned in any given year until that year is over. The actual mechanics of an EIA are too involved for a comment..
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Related article:
http://allfinancialmatters.com/2007/09/13/a-look-at-an-equity-indexed-annuity/#comment-141387
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