Index Annuity Questions To Ask Before You Buy.

What Are Indexed Annuities Pros And Cons?

2011-04-18T22:12:00.001-07:00

What Is An Indexed Annuity?

What are Indexed Annuities?

According to The National Association of Insurance Commissioners Buyer’s Guide, “An indexed annuity is a fixed annuity, either immediate or deferred, that earns interest or provides benefits that are linked to an external equity reference or an equity index.

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Mini Masseuse Pro Series

2010-10-29T04:31:00.001-07:00

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2010-10-27T07:12:00.001-07:00

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Gold: What Is The Economy Usually Doing When It Goes Up?

2010-09-23T06:52:00.001-07:00

Gold: What Is The Economy Usually Doing When It Goes Up?

Gold: What Is The Economy Usually Doing When It Goes Up?
Research proves wrong the idea that gold reliably rises during recessions, says EWI President Robert Prechter.
September 21, 2010
By Elliott Wave International

...If gold isn’t going up when the economy is contracting, when is it going up? Table 4 (see chart on p. 24 of this free Club EWI report -- Ed.) answers the question: All the huge gains in gold have come while the economy was expanding. This is true of the three most dramatic gold gains of the past century:

(1) Congress changed the official price of gold from $20.67 to $35 per ounce in 1934, during an economic expansion. The gain against the dollar was 69 percent.
(2) The entire bull market from 1970 to 1980 occurred during an economic expansion... [Of] the $815 per ounce that gold rose from 1970 to 1980, $725 worth of it came while the economy was expanding.
(3) The entire bull market from 2001 to the present occurred during an economic expansion... [Of] the $748 per ounce that gold has risen since February 2001, $726 worth of it has come while the economy was expanding.

Even lesser rises in gold, such as the two big rallies during the 1980s, came during economic expansions. So the biggest gains in gold, by far, have occurred while the economy was in expansion, not contraction.

Why is such the case? Simple: During expansions, liquidity is available, and it has to go somewhere. Sometimes it goes into stocks, sometimes it goes into gold, and sometimes it goes into both. During times of extreme credit inflation, such as we have experienced over the past three decades, the moves in these markets during economic expansions are likewise extreme. When recession hits, liquidity dries up, and investors stop buying. During depressions, they sell assets with a vengeance.

Of course, we socionomists do not believe in the external causality of investment price movements. Recessions and expansions do not make investment prices move up and down. Fluctuations in social mood propel the economy, liquidity and movements in investment prices. So the only reason we bother with studies like this is to de-bunk various commonly held views of financial causality. Now we know: The idea that gold reliably rises during recessions and depressions is wrong; in fact, like most such passionately accepted lore, it’s backwards.
Finish reading this 16-chapter paper online now, free! Download Robert Prechter's FREE 40-Page Gold and Silver eBook.

Here's what else you'll learn:

* Why Gold Is Still Money
* What Long Term Analysis of Gold Stocks Shows
* Study: Does Gold Always Go Up in Recessions and Depressions?
* True or False: Gold Is Better Than Stocks During Expansions
* What’s Next for Gold?
* Elliott Waves in the Silver Market
* MORE

Keep reading this free report now -- Download Robert Prechter's FREE 40-Page Gold and Silver eBook.

This article was syndicated by Elliott Wave International and was originally published under the headline Gold: What Is The Economy Usually Doing When It Goes Up?. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
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How to Forecast Markets Using Technical Analysis

2010-09-17T08:53:00.001-07:00

How to Forecast Markets Using Technical Analysis

Your Free Chance to Learn How to Forecast Markets Using Technical Analysis
EWI's Senior Tutorial Instructor Jeffrey Kennedy gives you practical lessons -- free
September 17, 2010
By Elliott Wave International

There are two camps of market analysts out there: the fundamental camp and the technical one. Fundamental analysts look at things like the GDP, unemployment, interest rates, etc. to make logical assumptions about where the stock market is going.

Technical analysts use none of that. They look at the market's internals to gauge the trend: things like momentum, trend channels -- and yes, Elliott wave patterns.

And this is your free chance to learn how they do it.

We've put together a free 54-page Club EWI resource for you, "The Ultimate Technical Analysis Handbook." Below is a short excerpt from chapter 3. Enjoy! (For details on how to read this free report in full, look below.)

The Ultimate Technical Analysis Handbook
Chapter 3: How To Integrate Technical Indicators Into an Elliott Wave Forecast
By EWI's Senior Tutorial Instructor Jeffrey Kennedy

I love a good love-hate relationship, and that’s what I’ve got with technical indicators. Technical indicators are those fancy computerized studies that you frequently see at the bottom of price charts that are supposed to tell you what the market is going to do next (as if they really could). The most common studies include MACD, Stochastics, RSI and ADX, just to name a few.

I often hate technical studies because they divert my attention from what’s most important -- PRICE. ... Nevertheless, I have found a way to live with them, and I do use them. Here’s how: Rather than using technical indicators as a means to gauge momentum or pick tops and bottoms, I use them to identify potential trade setups.

Out of the hundreds of technical indicators I have worked with over the years, my favorite study is MACD (an acronym for Moving Average Convergence-Divergence). ... Even though the standard settings for MACD are 12/26/9, I like to use 12/25/9 (it’s just me being different). An example of MACD is shown in Figure 6 (Coffee).

Coffee - December Contract Daily Data

The simplest trading rule for MACD is to buy when the Signal line (the thin line) crosses above the MACD line (the thick line), and sell when the Signal line crosses below the MACD line. Although many people use MACD this way, I choose not to... I like to focus on different information that I’ve observed and named: Hooks, Slingshots and Zero-Line Reversals. Once I explain these, you’ll understand why I’ve learned to love technical indicators. ...

Read the rest of the 50-page "Ultimate Technical Analysis Handbook" online now, free! All you need is to create a free Club EWI profile. Here's what else you'll learn:

Chapter 1: How the Wave Principle Can Improve Your Trading
Chapter 2: How To Confirm You Have the Right Wave Count
Chapter 3: How To Integrate Technical Indicators Into an Elliott Wave Forecast
Chapter 4: Origins and Applications of the Fibonacci Sequence
Chapter 5: How To Apply Fibonacci Math to Real-World Trading
Chapter 6: How To Draw and Use Trendlines
Chapter 7: Time Divergence: An Old Method Revisited
Chapter 8: Head and Shoulders: An Old-School Approach
Chapter 9: Pick Your Poison... And Your Protective Stops: Four Kinds of Protective Stops
Get more lessons like the one above in the free 50-page Ultimate Technical Analysis Handbook. Learn more and download your free copy here

This article was syndicated by Elliott Wave International and was originally published under the headline Your Free Chance to Learn How to Forecast Markets Using Technical Analysis. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Annuity Definition

Indexed Annuities

What is a Tax Deferred Indexed Annuity?

2010-09-07T09:53:00.001-07:00

What is a Tax Deferred Indexed Annuity? - Fixed Annuity Definition, Fixed Indexed Annuities, Lifetime Income Annuity

What is a Tax Deferred Indexed Annuity?

Tax-deferred indexed annuities are contracts between you and the insurance company with guaranteed interest and guaranteed annuity income options. There are no upfront sales commissions or administrative fees during the life of your indexed annuity.

Advantages of Tax Deferred Indexed Annuities include tax deferral, stability, may avoid probate, liquidity features, guaranteed income and guaranteed lifetime income riders.

Your equity-indexed annuity, like other fixed annuities, also promises to pay a minimum interest rate. The rate that will be applied will not be less than this minimum guaranteed rate even if the index-linked interest rate is lower. The value of your index annuity also will not drop below a guaranteed minimum. For example, many indexed annuities guarantee the minimum value will never be less than 80 percent of the premium paid, plus at least 1% in annual interest (less any partial withdrawals). The guaranteed value is the minimum amount available during a term of withdrawals, as well as for some annuitizations and death benefits. The annuity life insurance company will adjust the value of the indexed annuity at the end of each term to reflect any index increases.

In some indexed annuities, the average of an index's value is used rather than the actual value of the index on a specified date. The index averaging may occur at the beginning, the end, or throughout the entire term of the index annuity.

One of the primary advantages of deferred indexed annuities is the opportunity to accumulate a substantial sum of money by allowing your premium and interest to grow tax-deferred. Unlike taxable investments, you pay no taxes on your indexed annuity interest until you begin to take withdrawals or receive income. This allows your money to grow faster than in a taxable account, because you earn interest on the money that would have otherwise been paid in taxes.

Your tax-deferred indexed annuity is stable and safe. State insurance department laws require annuity insurance companies establish and maintain reserves equal to the cash surrender value of your annuity contract at all times. In addition, state laws require annuity life insurance companies maintain minimum amounts of capital and surplus for further contract owner protection.

Annuity life insurance companies invest your premium dollars in a diversity of investments that are closely regulated by the insurance departments. These long-term investments ensure the stability of the annuity company and help to provide you with a competitive yield.

In the case of premature death, your beneficiaries have the accumulated funds within your indexed annuity available to them, with most companies and may avoid the expense, delay and publicity of probate.

Most indexed annuities provide you with opportunities to withdraw funds at any time (subject to applicable surrender charges). Most index annuity contracts allow some form penalty-free withdrawals after the first contract anniversary. Some indexed annuities also have available certain riders which increase liquidity in the event of confinement to a nursing home or if diagnosed with a terminal illness.

Tax deferred indexed annuities provide you with a guaranteed income within a tax-deferred indexed annuity. You have the ability to choose from several different income options, including payments for a specified number of years or income for life, no matter how long you live. With non-qualified (non-IRA, 401k) plans, a portion of each annuity income payment represents return of premium which is not taxed, thereby reducing your tax liability from your indexed annuity income payments.

It is important to understand the features and trade-offs available so you can choose the index annuity that is right for you. Be aware that it may be misleading to compare one index annuity to another unless you compare all the other features of each index annuity. You must decide for yourself what combination of index annuity benefits makes the most sense for you.

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The Fed Won't Be Able To Save the Stock Market

2010-08-31T13:37:00.000-07:00

3 Reasons Now is Not the Time to Speculate in Stocks - Fixed Annuity Definition, Fixed Indexed Annuities, Lifetime Income Annuity

3 Reasons Now is Not the Time to Speculate in Stocks
Sometimes the investment weather forces you to 'buy a coat,' says Robert Prechter
August 31, 2010
By Elliott Wave International

When it's sunny, you head outside without a thought, but when it's rainy, you look for your umbrella.

When the markets are trending up, you don't worry about your investments much, but when the markets turn bearish ... what do you do?

In an interview with Jeff Sommer of The New York Times in July 2010, Robert Prechter said that he is convinced that a "market decline of staggering proportions" is on its way, and that individual investors should get out of the market and into cash and cash equivalents, such as Treasury bills.

"I'm saying: 'Winter is coming. Buy a coat,'" Prechter said. "Other people are advising people to stay naked. If I'm wrong, you're not hurt. If they're wrong, you're dead. It's pretty benign advice to opt for safety for a while."

Read some of the latest nuggets directly from Elliott Wave International President Robert Prechter's desk -- FREE. Click here to download a free report packed with recent analysis and forecasts from Prechter's Elliott Wave Theorist.

For more specific advice as to why now is not the right time to speculate in stocks, here's an excerpt from chapter 20 of Prechter's business best-selling book, Conquer the Crash -- You Can Survive and Prosper in a Deflationary Depression, 2nd edition 2009.

* * * * *

Should You Speculate in Stocks?

Perhaps the number one precaution to take at the start of a deflationary crash is to make sure that your investment capital is not invested “long” in stocks, stock mutual funds, stock index futures, stock options or any other equity-based investment or speculation. That advice alone should be worth the time you spent to read this book.

1. Stocks May Go to Near Zero

In 2000 and 2001, countless Internet stocks fell from $50 or $100 a share to near zero in a matter of months. In 2001, Enron went from $85 to pennies a share in less than a year. These are the early casualties of debt, leverage and incautious speculation. Countless investors, including the managers of insurance companies, pension funds and mutual funds, express great confidence that their “diverse holdings” will keep major portfolio risk at bay. Aside from piles of questionable debt, what are those diverse holdings? Stocks, stocks and more stocks. Despite current optimism that the bull market is back, there will be many more casualties to come when stock prices turn back down again.

2. Stock Mutual Funds Will Fall, Too

Not only will many stocks fall 90 to 100 percent, but so will a substantial number of stock mutual funds, which cannot exit large equity positions without depressing prices and which have the added burden to you of one percent (or more) annual management fees. The good news is that we will finally find out who the few truly good fund managers are and which ones were heroes by virtue of being around for a bull market.

3. The Fed Won't Be Able To Save the Stock Market

Don’t presume that the Fed will rescue the stock market, either. In theory, the Fed could declare a support price for certain stocks, but which ones? And how much money would it commit to buying them? If the Fed were actually to buy equities or stock-index futures, the temporary result might be a brief rally, but the ultimate result would be a collapse in the value of the Fed’s own assets when the market turned back down, making the Fed look foolish and compromising its primary goals, as cited in Chapter 13. It wouldn’t want to keep repeating that experience. The bankers’ pools of 1929 gave up on this strategy, and so will the Fed if it tries it.

Read some of the latest nuggets directly from Elliott Wave International President Robert Prechter's desk -- FREE. Click here to download a free report packed with recent analysis and forecasts from Prechter's Elliott Wave Theorist.

This article was syndicated by Elliott Wave International and was originally published under the headline 3 Reasons Now is Not the Time to Speculate in Stocks. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

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The Hindenburg Omen -- Omen-ous or Not? ElliottWave

2010-08-25T11:07:00.001-07:00

The Hindenburg Omen -- Omen-ous or Not?

Hindenburg Omen -- Omen-ous or Not?
Elliott Wave International Chief Market Analyst Steve Hochberg Sheds Light on a Feared Technical Indicator
August 24, 2010

By Elliott Wave International

On Aug. 12, volatile market action coincided with a technical signal called the Hindenburg Omen, whereby a relatively high number of new highs and lows in individual stocks occur at the same time.

This indicator instantly gained an enormous amount of media attention. So we sat down with Steve Hochberg, EWI's chief market analyst and close colleague of Robert Prechter, to ask him about the now-infamous Hindenburg Omen.

EWI: Steve, recently a market indicator called the Hindenburg Omen has been in the news, what is going on?

Steve Hochberg: Discussion of this indicator certainly has been everywhere. Someone emailed us and said they even saw it mentioned on the front page of the Drudge Report! Look, headline-grabbing names grab headlines. Essentially it measures the fractured nature of market action. Over the years, we've discussed numerous times in our publications how a fractured market is oftentimes an unhealthy market. The multiple non-confirmations registered at the recent August 9 stock high, which we talked about in the Short Term Update, are another manifestation of this bearish behavior. The message is consistent with how we view the Elliott wave structure.

EWI: Why are people interested in this particular indicator?

SH: That's a good question, and it speaks to a broader issue, viz., the "re-emergence" of technical analysis into the mainstream consciousness of market participants. In Prechter's Perspective, Robert Prechter discusses the timing of the popularity of technical analysis, of which Elliott waves, or pattern recognition, is the highest form:

"In long term bull markets, no one really needs market timing because the market is always going up. This was true during the 1950s and 1960s, a period of market strength. And it has been mostly true since 1982. From 1966 to 1982, though, the market was very cyclic, so investors couldn't sleep like babies with a buy-and-hold blanket like they do today."

The S&P 500 has a negative return over at least the past 12 years, so investors are naturally questioning the "broadly diversified, buy and hold" stance advocated by 90%+ of investment advisors. EWI subscribers are way ahead of the mass of investors because as the bear market progresses, the media should show increased focus on technical analysis, including patterns such as head-and-shoulders as well as trendlines, moving averages and, yes, even Elliott waves, just as they did during the last great bear market from 1966 to 1982. It will be an exciting time for those with even a cursory knowledge of the technicals.

EWI: So, what are you seeing now?

SH: Obviously we cannot give away our analysis, but the wave structure is clear, the myriad indicators we keep offer compelling confirmation and the market is accommodating our forecast. If readers have any interest in what this means for not only the stock market, but also all other markets, please give us a read to see if our work might be useful in helping to formulate your investment portfolio. We think it will be a worthwhile endeavor.

Read some of the latest nuggets directly from Elliott Wave International President Robert Prechter's desk -- FREE. Click here to download a free report packed with recent analysis and forecasts from Prechter's Elliott Wave Theorist.

This article was syndicated by Elliott Wave International and was originally published under the headline The Hindenburg Omen -- Omen-ous or Not?. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

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Lifetime Annuities Provide Life Annuity Income, But How To Find The Best Rate?

2010-08-21T11:16:00.001-07:00

Life Annuities - Life Annuity, Lifetime Annuities, Annuities For Life - Fixed Annuity Definition, Fixed Indexed Annuities, Lifetime Income Annuity

Life annuities:

Straight life annuity:

This option provides payments for the rest of your life, even if the payments exceed the money you put into the annuity. While this option usually pays out the most, if you die before all of the money you put in has been distributed, no additional payments will be made to your dependents.

Joint and survivor life annuities:

This life annuity provides payments to you as long as you live and to a designated beneficiary as long as he or she lives. Life income with refund annuity. With this product, payouts continue for life, but if you die before collecting all the premiums you have paid, your beneficiary collects the remaining money.

Life annuity with period certain:

This annuity offers income for life. If you die before receiving the total of premiums paid, your beneficiary receives payments for the remainder of the period.

Annuity Definition

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Fidelity 401k Hardship Withdrawals up 20% in Second Quarter.

2010-08-20T14:35:00.001-07:00

401k Withdrawal, 401(k) Withdrawals From Your 401k

Many 401(k) plans allow employees to make a hardship withdrawal because of immediate and heavy financial needs. Generally, hardship withdrawal distributions from a 401(k) plan are limited to the amount of the employees' elective contributions only, and do not include any income earned on the deferred amounts. Hardship 401k withdrawal distributions are not treated as eligible rollover withdrawal distributions.

401 k withdrawal distributions received before age 59 1/2 are subject to an early distribution penalty of 10% additional tax unless an exception applies. For more information about the treatment of retirement plan distributions, refer to Publication 575, Pension and Annuity Income.

Elliott Wave - Efficient Market Hypothesis: R.I.P.

2010-08-19T16:50:00.001-07:00

Efficient Market Hypothesis: R.I.P. - Fixed Annuity Definition, Fixed Indexed Annuities, Lifetime Income Annuity

Efficient Market Hypothesis: R.I.P.

August 19, 2010
By Elliott Wave International

Of all the belief systems of Wall Street, few can claim the devoted following of the Efficient Market Hypothesis, the idea that stock prices adhere to the same laws of supply-and-demand that govern retail products. Once coined the theoretical "Parthenon" of economics, this notion has consistently endured the test of time ----- until now. Academics and advisors across the globe are currently exposing crack after crack in the "Efficient" model so deep as to bring the entire theory crashing to the ground.

"The EMH is not only dead," writes a July 29, 2010 news source. "It's really, most sincerely dead." (Minyanville)

As to what caused the theory's collapse -- one recent business journal offers this insight:

"Financial markets do not operate the same way as those for other goods and services. When the price of a television set or software package goes up, demand for it generally falls. When the prices of a financial asset rises, demand generally rises." (The Economist)

Here's the thing. SIX years ago, Elliott Wave International president Bob Prechter pronounced the exact same finding in his April 2004 Elliott Wave Theorist. (Read that full-length publication today, absolutely free by clicking on the hyperlink) In that groundbreaking report, Bob presented the compelling picture below that shows how investors increase their percentage of stock holdings as prices rise, and decrease them as prices fall:

The next question is why? Answer: Motivation: i.e. the purchase of goods and services is about need; while the purchase of stocks is about desire. Here, Bob Prechter's 2004 Theorist takes the rein:

"The fact is that everyday in finance, investors are uncertain. So they look to the herd for guidance. Because herds are ruled by the majority -- financial market trends are based on little more than the shared mood of investors -- how they feel -- which is the province of the emotional areas of the brain (limbic system), not the rational ones (neocortex)... Buyers, in a rising market appear unconsciously to think, 'The herd must know where the food is. Run with the herd and you will prosper.' Sellers in a falling market appear to unconsciously think, 'The herd must know that there's a lion racing toward us. Run with the herd or you will die.'"

Prechter and contributor Wayne Parker then expanded on his landmark observation in the 2007 Journal of Behavioral Finance. (Also available, absolutely free by clicking on the hyperlink)

In the end, it's not enough to just tear down the long-standing EMH. One must build another, more accurate model up in its place. And in the 2004 Theorist, Bob Prechter does just that with the Wave Principle, which reconciles the technical and psychological sides of stock market behavior into this key point: Herding impulses, while not rational, are also NOT random. They unfold in clear and calculable wave patterns as reflected in the price action of financial markets.

As the mainstream media continues to jump on board Prechter's Financial/Economic Dichotomy Theory, you can read both of Prechter's original writings. Enjoy your complimentary access to the 2004 April 2004 Elliott Wave Theorist and the 2007 Journal of Behavioral Finance.

Read some of the latest nuggets directly from Robert Prechter's desk -- FREE. Click here to download a free report packed with recent quotes from Prechter's Elliott Wave Theorist.

This article was syndicated by Elliott Wave International and was originally published under the headline Efficient Market Hypothesis: R.I.P.. EWI is the world's largest market forecasting firm. Its staff of full-time analysts lead by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Annuity Definition

Slicing the Neckline: A Classic Technical Pattern Agrees with the Elliott Wave Count

2010-08-18T17:31:00.001-07:00

Slicing the Neckline: A Classic Technical Pattern Agrees with the Elliott Wave Count - Fixed Annuity Definition, Fixed Indexed Annuities, Lifetime Income Annuity

Slicing the Neckline: A Classic Technical Pattern Agrees with the Elliott Wave Count

August 17, 2010
By Elliott Wave International

In the August issue of his Elliott Wave Theorist, market forecaster Robert Prechter alerted readers that the U.S. stock market was slicing the neckline of a classic head-and-shoulders pattern in technical analysis, and that this may send the market into critical condition.

Prechter said that when the Elliott wave count and a head-and-shoulders pattern are saying the same thing about the stock market, it's best to pay attention.

Read some of the latest nuggets directly from Robert Prechter's desk -- FREE. Click here to download a free report packed with recent quotes directly from Prechter's Elliott Wave Theorist.

Here's how the August issue of the Elliott Wave Financial Forecast, the sister publication to Prechter's Theorist, described the head and shoulders pattern unfolding in the stock market:

"The weekly Dow chart [below] shows the development of an intermediate-term, head-and-shoulders pattern from the January high at 10,729.90 to the present. The January high marks the left shoulder, the April 26 high at 11,258 is the head, and the right shoulder is now ending. The April [Theorist] discussed the pertinent characteristics that Edwards and Magee used to define this technical pattern ... all apply to the current formation. Observe how weekly stock trading volume has contracted during the development of the right shoulder, a necessary trait of this pattern. The downward-sloping neckline -- exactly as on the big ten year pattern -- displays market weakness, which is consistent with our interpretation of the wave structure."

This chart shows the head-and-shoulders pattern.

Total U.S. Stock Market Volume

Here's what Robert Prechter himself said in a recent Elliott Wave Theorist:

"Generally, when the neckline slopes downward, the right shoulder does not rise to the level of the left shoulder ..."

Please look at the chart again -- then re-read Prechter's quote.

Read some of the latest nuggets directly from Robert Prechter's desk -- FREE. Click here to download a free report packed with recent quotes from Prechter's Elliott Wave Theorist.

This article was syndicated by Elliott Wave International and was originally published under the headline Slicing the Neckline: When the Market May Go into "Critical Condition". EWI is the world's largest market forecasting firm. Its staff of full-time analysts lead by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Annuity Definition

Deflation: First Step, Understand It

2010-08-17T12:30:00.001-07:00

Deflation: First Step, Understand It
There is still time to prepare if deflation is indeed in our future.
August 16, 2010

By Elliott Wave International

"Fed's Bullard Raises Specter of Japanese-Style Deflation," read a July 29 Washington Post headline.

When the St. Louis Fed Chief speaks, people listen. Now that deflation -- something that EWI's president Robert Prechter has been warning about for several years -- is making mainstream news headlines, is it too late to prepare?

It's not too late.

There are still steps you can take if deflation is indeed in our future. The first step is to understand what it is. So we've put together a special, free, 60-page Club EWI resource, "The Guide to Understanding Deflation: Robert Prechter’s most important warnings about deflation." Enjoy this quick excerpt. (For details on how to read this important report free, look below.)

When Does Deflation Occur?
By Robert Prechter

To understand inflation and deflation, we have to understand the terms money and credit.

Money is a socially accepted medium of exchange, value storage and final payment; credit may be summarized as a right to access money. In today’s economy, most credit is lent, so people often use the terms "credit" and "debt" interchangeably, as money lent by one entity is simultaneously money borrowed by another.

Deflation requires a precondition: a major societal buildup in the extension of credit (and its flip side, the assumption of debt). Austrian economists Ludwig von Mises and Friedrich Hayek warned of the consequences of credit expansion, as have a handful of other economists, who today are mostly ignored. Bank credit and Elliott wave expert Hamilton Bolton, in a 1957 letter, summarized his observations this way:

In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following:
(a) All were set off by a deflation of excess credit. This was the one factor in common.
(b) Sometimes the excess-of-credit situation seemed to last years before the bubble broke.
(c) Some outside event, such as a major failure, brought the thing to a head, but the signs were visible many months, and in some cases years, in advance.
(d) None was ever quite like the last, so that the public was always fooled thereby.
(e) Some panics occurred under great government surpluses of revenue (1837, for instance) and some under great government deficits.

Near the end of a major expansion, few creditors expect default, which is why they lend freely to weak borrowers. Few borrowers expect their fortunes to change, which is why they borrow freely. The psychological aspect of deflation and depression cannot be overstated. ...

Read the rest of this important 60-page Robert Prechter's report online now, free! Here's what else you'll learn:

What Makes Deflation Likely Today?
How Big a Deflation?
Why Falling Interest Rates in This Environment Will Be Bearish
Myth: "Deflation Will Cause a Run on the Dollar, Which Will Make Prices Rise"
Myth: "Debt Is Not as High as It Seems"
Myth: "War Will Bail Out the Economy"
Myth: "The Fed Will Stop Deflation"

This article was syndicated by Elliott Wave International and was originally published under the headline Deflation: First Step, Understand It. EWI is the world's largest market forecasting firm. Its staff of full-time analysts lead by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Annuity Definition

7 Ways to Become an Unsuccessful Trader

2010-08-12T11:15:00.001-07:00

7 Ways to Become an Unsuccessful Trader

Q&A with an experienced Elliott wave trader reveals seven common trading mistakes.
August 12, 2010

By Elliott Wave International

To be a successful trader demands knowledge.

If you'd prefer to become an unsuccessful trader, you can start by making the following common trading mistakes, detailed by a professional who spent 25 years in portfolio management, trading and forecasting in the financial capital of the world, New York City.

In 2002, Wayne Gorman, long-time Elliott wave trader and current head of trader education at Elliott Wave International, left his 35th floor Manhattan apartment and moved to the quiet of North Georgia. He's been sharing his knowledge and skills with aspiring traders ever since -- in both online seminars and before live audiences around the world.

Wayne graciously agreed to a Q&A about trading mistakes. In his interview, Wayne reveals seven common mistakes traders make.

--------

EWI: Could you name two mistakes frequently made by stock traders?

Wayne Gorman: (mistake 1) The first big mistake is the flawed logic of extrapolation. Many traders and investors assume that a trend will remain in force until an "event" comes along to change it. But market trends are not like billiard balls on a pool table. This false assumption will put you on the wrong side of the market more times than not, especially at major turning points.

(mistake 2) The second big mistake is to suppose that news events drive market trends. In fact, the opposite is true: economic, political and social events lag market trends.

EWI: What are two common mistakes among options traders?

WG: (mistake 3) One common mistake is to buy puts or calls that are way "out of the money," with no other transactions to compliment them. Unless your timing is absolutely perfect -- and who has perfect timing? -- your chance of success is low. It’s like buying a lottery ticket.

(mistake 4) Another common mistake is to buy options with too little time left to expiration. With less than one month to expiration, the time decay begins to accelerate and the chances of success diminish.

EWI: Please name a frequent mistake among traders who aim to catch the beginning of a particular Elliott wave.

WG: (mistake 5) In the middle of a corrective pattern, it's common to run out of patience while waiting for confirmation of a trend change. You have to give corrective patterns time to unfold before you jump in. This requires discipline, and a solid understanding of the many ways corrective patterns can unfold.

EWI: What's the biggest misconception among traders about using Elliott waves?

WG: (mistake 6) Too many traders think Elliott wave is a trading system that tells you exactly where to enter and exit a particular market. That's the biggest misconception. The reality is that it's an analytical and forecasting tool, which helps you develop and use your own trading system, based on your own personal risk tolerance.

EWI: What technical indicators do you believe traders over-rely on, and why?

WG: (mistake 7) Traders tend to over-rely on momentum indicators such as RSI, Stochastics and MACD to precisely spot turning points. But to paraphrase Mark Twain, markets can stay overbought or oversold a lot longer than either you or I can remain solvent.

EWI: How would you characterize today's market action, and do you teach courses that address this environment?

WG: This is a difficult stock market in the near term. Prices haven't strayed far from where they began in January. The action has yet to break out significantly to the downside or upside. This situation may not last much longer. I can suggest these online courses to deal with the current situation, and to prepare for the next big move:

This article was syndicated by Elliott Wave International and was originally published under the headline Do You Recognize These Six Common Trading Mistakes?. EWI is the world's largest market forecasting firm. Its staff of full-time analysts lead by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Annuity Definition

The Economic Crisis No One Saw Coming: A Convenient Untruth

2010-08-10T09:54:00.001-07:00

The Economic Crisis No One Saw Coming: A Convenient Untruth - Fixed Annuity Definition, Fixed Indexed Annuities, Lifetime Income Annuity

August 9, 2010

By Elliott Wave International

The single most convenient untruth about the 2008 (and counting) financial crisis is that it was unforeseen. For two years policymakers have insisted "There was no way to know ahead of time" that the liquidity boom would come to a screeching halt. Back in November 2008, in fact, the usually tight-lipped Queen of England herself publicly described the turmoil of international markets as "awful" and openly asked a panel of experts from the London School of Economics "Why did nobody notice?"

Her Majesty is right: Most financial authorities did NOT notice the crisis before it was too late. Comedy Central's "The Daily Show with Jon Stewart" of all places provided the most poignant evidence: A March 2009 video montage shows executives and economists from the world's leading financial firms repeatedly forecasting continued upside strength in stocks, plus renewed bull market growth in financials -- right as debt markets came unhinged and the US stock market headed into a 50%-plus selloff.

Dubbed the "8-Minute Rap" (after the "18-Minute Gap" of Nixon's Watergate tapes), the Daily Show video feature sent an equally powerful message, as the clip below makes plain.

Yet even as the mainstream authorities failed to detect the economic earthquake moving below their own feet, somebody did "notice" well in advance. That person was EWI's president Bob Prechter.

The clip below is from a 2007 Bloomberg interview. Clear as PLAY, the foreseeable nature of the crisis emerges from Bob's October 19, 2007 interview.

As the historic trend change began to unfold, Bob issued this timely insight:

"We've seen the first crack in the credit structure with a huge drop in commercial paper... These are the harbingers of a change toward the downside for the stock market, commodities including oil, and the debt market itself."

Don't believe the convenient untruths. Get objective market analysis today. Download this free report that contains valuable market forecasts directly from the desk of Bob Prechter.

This article, The Economic Crisis No One Saw Coming: A Convenient Untruth, was syndicated by Elliott Wave International. EWI is the world's largest market forecasting firm. Its staff of full-time analysts lead by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Annuity Definition

Stress Test: How to Find the Safest Banks in the U.S. and Abroad

2010-08-03T09:17:00.001-07:00

Stress Test: How to Find the Safest Banks in the U.S. and Abroad - Fixed Annuity Definition, Fixed Indexed Annuities, Lifetime Income Annuity

Stress Test: How to Find the Safest Banks in the U.S. and Abroad

August 3, 2010

By Elliott Wave International

Stress test results for the biggest European banks were recently released, while the largest U.S. banks took their first stress tests in May 2009. But most people don't really care how much stress their banks are under; they are more worried about their own stress levels. One thing that adds to personal stress is worrying about whether their deposits are in a safe place. Bob Prechter has encouraged people to find the safest banks for their money since he originally wrote his New York Times best-selling book, Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression in 2002. This excerpt explains why banks of all sizes are riskier than they used to be (think about portfolios stuffed with derivatives, emerging market debt and non-performing commercial loans). You can also get a list of the Top 100 Safest U.S. Banks -- two banks per state -- that was just updated in late June with the latest available data by joining Club EWI and receiving EWI's Safe Banks report.

* * * * *
Excerpted from Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression, by Robert Prechter

Many major national and international banks around the world have huge portfolios of “emerging market” debt, mortgage debt, consumer debt and weak corporate debt. I cannot understand how a bank trusted with the custody of your money could ever even think of buying bonds issued by Russia or Argentina or any other unstable or spendthrift government. As At the Crest of the Tidal Wave put it in 1995, “Today’s emerging markets will soon be submerging markets.” That metamorphosis began two years later. The fact that banks and other investment companies can repeatedly ride such “investments” all the way down to write-offs is outrageous.

Many banks today also have a shockingly large exposure to leveraged derivatives such as futures, options and even more exotic instruments. The underlying value of assets represented by such financial derivatives at quite a few big banks is greater than the total value of all their deposits. The estimated representative value of all derivatives in the world today is $90 trillion, over half of which is held by U.S. banks. Many banks use derivatives to hedge against investment exposure, but that strategy works only if the speculator on the other side of the trade can pay off if he’s wrong.

Relying upon, or worse, speculating in, leveraged derivatives poses one of the greatest risks to banks that have succumbed to the lure. Leverage almost always causes massive losses eventually because of the psychological stress that owning them induces. You have already read of the tremendous debacles at Barings Bank, Long-Term [sic] Capital Management, Enron and other institutions due to speculating in leveraged derivatives. It is traditional to discount the representative value of derivatives because traders will presumably get out of losing positions well before they cost as much as what they represent. Well, maybe. It is at least as common a human reaction for speculators to double their bets when the market goes against a big position. At least, that’s what bankers might do with your money.

Today’s bank analysts assure us, as a headline from The Atlanta Journal-Constitution put it on December 29, 2001, that “Banks [Are] Well-Capitalized.” Banks today are indeed generally considered well capitalized compared to their situation in the 1980s. Unfortunately, that condition is mostly thanks to the great asset mania of the 1990s, which, as explained in Book One, is probably over. Much of the record amount of credit that banks have extended, such as that lent for productive enterprise or directly to strong governments, is relatively safe. Much of what has been lent to weak governments, real estate developers, government-sponsored enterprises, stock market speculators, venture capitalists, consumers (via credit cards and consumer-debt “investment” packages), and so on, is not. One expert advises, “The larger, more diversified banks at this point are the safer place to be.” That assertion will surely be severely tested in the coming depression.

There are five major conditions in place at many banks that pose a danger: (1) low liquidity levels, (2) dangerous exposure to leveraged derivatives, (3) the optimistic safety ratings of banks’ debt investments, (4) the inflated values of the property that borrowers have put up as collateral on loans and (5) the substantial size of the mortgages that their clients hold compared both to those property values and to the clients’ potential inability to pay under adverse circumstances. All of these conditions compound the risk to the banking system of deflation and depression.

Financial companies are enjoying big advances in the current stock market rally. Depositors today trust their banks more than they trust government or business in general. For example, a recent poll asked web surfers which among a list of seven types of institutions they would most trust to operate a secure identity service. Banks got nearly 50 percent of the vote. General bank trustworthiness is yet another faith that will be shattered in a depression.

Well before a worldwide depression dominates our daily lives, you will need to deposit your capital into safe institutions. I suggest using two or more to spread the risk even further. They must be far better than the ones that today are too optimistically deemed “liquid” and “safe” by both rating services and banking officials.

Inside the revealing free report, you'll discover:

The 100 Safest U.S. Banks (2 for each state)
Where your money goes after you make a deposit
How your fractional-reserve bank works
What risks you might be taking by relying on the FDIC's guarantee

Please protect your money. Download the free 10-page "Safe Banks" report now.
Learn more about the "Safe Banks" report, and download it for free here.

This article, Stress Test: How to Find the Safest Banks in the U.S. and Abroad,was syndicated by Elliott Wave International. EWI is the world's largest market forecasting firm. Its staff of full-time analysts lead by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Annuity Definition

Technicals vs. Fundamentals: Which are Best When Trading Crude Oil and Natural Gas?

2010-07-26T09:12:00.001-07:00

Technicals vs. Fundamentals: Which are Best When Trading Crude Oil and Natural Gas

Technicals vs. Fundamentals: Which are Best When Trading Crude Oil and Natural Gas?

July 26, 2010

By Elliott Wave International

If "fundamentals" drive trend changes in financial markets, then shouldn't the same factors have consistent effects on prices?

For example: Positive economic data should ignite a rally, while negative news should initiate decline. In the real world, though, this is hardly the case.

On a regular basis, markets go up on bad news, down on good news, and both directions on the same news -- almost as if to say, "Talk to the hand cuz the chart ain't listening."

Unable to deny this fly in the fundamental ointment, the mainstream experts often attempt to reconcile the inconsistencies with phrases like "shrugged off," "defied" or "in spite of."

That begs the next question: How do you know when a market is going to cooperate with fundamental logic and when it won't? ANSWER: You don't.

Get FREE access to Elliott Wave International's most intensive forecasting service for the global Energy markets. Now through noon Eastern time July 28, you can get timely intraday charts, forecasts and analysis for Crude Oil and Natural Gas. You'll also get daily, weekly and monthly analysis and forecasts for all major Energy markets and Energy ETFs. Access FreeWeek now.

Take, for instance, the first three news items below regarding the July 22 performance in crude oil, versus the fourth headline, which occurred on July 23:

Crude prices surge nearly 4% in their sharpest one-day percentage gain since May. The rally was "aided by fears that Tropical Storm Bonnie will enter the Gulf of Mexico over the weekend and disrupt oil production." (Wall Street Journal)
"Oil Prices Soar As Gulf Storm Threat Looms" (Associated Press)
"The storm should keep oil prices bubbling if it continues to strengthen and remain on track." (Bloomberg)

vs.

"Oil Slips From Surge Despite Storm Threats" (Commodity Online)

Unlike fundamental analysis, technical analysis methods don't rely on the news to explain or predict market moves. They look at the markets' internals instead.

Get FREE access to Elliott Wave International's most intensive forecasting service for the global Energy markets. Now through noon Eastern time July 28, you can get timely intraday charts, forecasts and analysis for Crude Oil and Natural Gas. You'll also get daily, weekly and monthly analysis and forecasts for all major Energy markets and Energy ETFs. Access FreeWeek now.
Annuity Definition

Quadrillion Dollar Debt: 'Day of Reckoning' Looms

2010-07-22T09:53:00.001-07:00

Quadrillion Dollar Debt: 'Day of Reckoning' Looms - Fixed Annuity Definition, Fixed Indexed Annuities, Lifetime Income Annuity

Quadrillion Dollar Debt: 'Day of Reckoning' Looms
What Will Happen as $1,000,000,000,000,000 in Global Debt Winds Down?
July 22, 2010

By Elliott Wave International

The biggest balloon in the world is deflating.

This balloon had been inflated with a quadrillion (1015) dollars, which is to say: This balloon was filled not with air but with debt from around the globe.

What will happen as this global debt winds down? In two words: Deflationary Depression -- the likes of which could be unprecedented in history.

Want to Know How to Prosper in a Deflationary Depression?If you haven't yet given Robert Prechter's deflation argument your full attention, you should know now that yesterday was the best time to do so. Download Prechter's 60-Page Guide to Understanding Deflation here.

A thousand trillion in debt can't be wished away or swept under the rug. No one can "forgive" the debt. The consequences of unwinding this debt could be as massive as the dollar figure itself.

We've heard plenty about the debt problems of Greece, Spain, Portugal and Italy.

But how about the world's second largest economy? Consider this fact reported in the Japan Times (July 8):

"Japan's government debts are the highest the world has ever seen, at 219 percent of gross domestic product, according to the International Monetary Fund."

Then there's the world's sixth largest national economy. In January 2009, Robert Prechter wrote this in the Elliott Wave Theorist:

"British banks have amassed $4.4 trillion worth of foreign liabilities, twice Britain's annual GDP. ... England, moreover, 'has not defaulted since the Middle Ages.' The possibility that it may do so again is yet another indication that the bear market is of ... (larger) degree, exactly as Elliott wave analysts have predicted all along."

Remember, Japan and Great Britain are major world economies. Imagine what the debt totals would look like in a line-item analysis of other nations, regions, states, provinces and municipalities around the world, including the U.S.

De-leveraging will likely lead to a deflationary crash -- a "day of reckoning."

How can you prepare for a deflationary crash?

To start with, keep your money safe. As Bob Prechter mentions in the June 2010 Elliott Wave Theorist:

"Investors should be primarily in greenback cash and Treasury bills."

He also describes holdings which should be strictly avoided.

Want to Know How to Prosper in a Deflationary Depression?If you haven't yet given Robert Prechter's deflation argument your full attention, you should know now that yesterday was the best time to do so. Download Prechter's 60-Page Guide to Understanding Deflation here.
Annuity Definition

Annuities

2010-04-03T15:17:00.001-07:00

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Indexed Annuities- Wharton Financial Institutions Center: Real World Index Annuity Returns

2009-12-04T14:24:00.001-08:00

Wharton Financial Institutions Center
Wharton Financial Institutions Center
Personal Finance
Real World Index Annuity Returns
Jack Marrion*
indexannuity@mail.com
Geoffrey VanderPal**
drvanderpal@gmail.com
David F. Babbel***
Babbel@Wharton.UPenn..edu
October 5, 2009

Abstract

• We offer the first empirical exploration of fixed indexed annuity returns based upon actual
contracts that were sold and actual interest that was credited.

• Annuity returns have been competitive with alternative portfolios of stocks and bonds.

• Their design has limited the downside returns associated with declining markets.

• They have achieved respectable returns in more robust equity markets.

• Studies that have criticized FIAs are typically based on hypothesized crediting rate formulae,
constant participation rates and caps, and unrealistic simulations of stock market and interest
rate behavior. When actual policy data are used, the conclusions change.

• Our study is exploratory, because although it is based on actual contracts and actual crediting
rates, our policy data set is neither randomly selected nor comprehensive.

Keywords: Indexed annuities, retirement, optimal asset allocation
JEL classifications: G11, G22, G23, J26
* MBA, doctoral candidate in the area of cognitive bias in decision-making, President of Advantage Compendium.
** DBA, MBA, CFP®, CLU, CFS, RFC®, CTP, CAMS, Chief Investment Officer of Skyline Capital Management.
*** Professor of Insurance and Finance, The Wharton School of Business, University of Pennsylvania; Senior Advisor
to Charles River Associates; Fellow of Wharton Financial Institutions Center.
Wharton Financial Institutions Center 1
Real World Index Annuity Returns
Jack Marrion, Geoffrey VanderPal, David F. Babbel

Introduction

Financial advisors and financial planners have sought various programs to provide clients protection
from systematic risk, also known as market risk. Various asset allocation strategies have
been used with limited success when extreme market movements and “black swans” occur
(Taleb, 2007). It has been known for close to 50 years that equity market returns do not conform
to a Guassian, or Normal distribution (Mandelbrot, 1963; Fama, 1963).i Rather, probability distributions
of market returns are typically skewed and leptokurtic (fat-tailed). When these leptokurtic
events occur on the positive side of the distribution, clients are delighted, but the opposite
is true when these events occur on the negative end of the two-tailed distribution.

Principal preservation products have evolved to address the needs of many risk-averse consumers
by providing them a safety net for their investment/savings capital. The products are structured
in a way that reduces correlations with other asset classes. To illustrate better the extremes
of market returns, we can examine the Russell 3000 index that accounts for nearly 98% of the
publicly traded U.S. equity market. A study by Eric Crittenden and Cole Wilcox (2008) at Blackstar
Funds was conducted using Russell 3000 data from 1983 through 2006. The findings were
that “about 40% of the stocks had negative returns over their lifetime, and about 20% of stocks
lost nearly all of their value. A little more than 10% of stocks recorded huge wins over 500%”
(Richardson, 2009). These data indicate that most of the positive market return over time comes
from relatively few performers, which lends support to the use of stock index strategies as part of
an overall portfolio. Furthermore it supports the notion that there is significant risk in the stock
market and thus, for moderately to highly risk-averse clients, the need for principal protection
programs such as fixed indexed annuities (FIA’s). Nearly 96% of FIA’s possess reset (or ratchet)
features that allow for locking in positive returns each annual or biannual period. By eliminating
the prejudicial effects occasioned by significant stock market declines, and locking in returns annually
or biannually, there is less of a need to try and capture large upside market swings to recover
from the declines.

As financial professionals, we are tasked with assisting our more risk-averse clients to protect
themselves from black swans and many of us have a fiduciary responsibility. One of the significant
developments for principal or asset preservation vehicles has been the fixed index annuity
(VanderPal, 2004). During the past few years various articles have been written regarding the
value in FIA’s and some people relying upon these studies have drawn misleading inferences
from them.

The article begins by dispelling the two basic errors people often make in assessing the message
of FIA studies. We will illustrate these misconceptions by using actual crediting rates on various
kinds of FIA policies. With these data we are able to show actual returns on FIA’s rather than
make inferences from hypothetical crediting rates derived from assumed (and often constant) rate
caps, assumed crediting rate formulae, and hypothetical participation rates, often coupled with
theoretical stock market and interest rate moves. This should help inform the public and correct
the inaccurate information portrayed by some journalists and industry professionals. Furthermore,
the article will delve into additional FIA features that provide advantages not found in ordinary
securities and various principal preservation programs.

FIA Market Growth
The table below indicates the growth in sales of FIA’s since 1997. Overall sales of FIA’s in 2008
of $26.7 billion are small compared to fixed deferred annuity sales of $95.1 billion and variable
annuities sales of $155 billion in 2008 (Green, 2009), and dwarfed by securities sales.
Equity Index Annuity Sales
Year In billions of dollars
1997-3.00
1998-4.20
1999-5.15
2000-5.25
2001-6.50
2002-11.70
2003-14.01
2004-23.00
2005-27.26
2006-25.30
2007-25.20
2008-26.70

Sources: Various reports from The Advantage Group, and (Koco, 2009)
Although the FIA market may be small relative to more established markets, it has nonetheless
attracted several performance studies. We have noticed two basic limitations that typify most
studies and articles that attempt to describe potential index annuity performance. The first of
these is assuming crediting formulae that are rarely used and crediting rates that are seldom observed.
While this type of exploratory exercise is fine in and of itself, a problem arises when
readers assume the theoretical results are somehow representative of the index annuity world.
The second limitation is making assumptions about stock market and interest rate behavior that
are not well supported. This can lead people to make inferences about actual FIA behavior that
are unjustified. Our study examines these limitations and shows how actual index annuity returns
are at odds with many of the hypothetical conclusions.

Are Hypothetical Returns Representative?

Collins, Lam and Stampfli (2009) created a term end point structure (they call it a multi-year,
point-to-point) that applied a 75% participation rate to any gain over a seven-year period. They
then calculated the annual return, deducted a 1% spread, and finally compounded the lower of
8% or the calculated annual yield to produce the total gain for the period. This is a rather cumbersome
structure, and one we cannot find was ever used on any index annuity.

In reviewing specifications on the over 400 index annuities marketed since the first index annuity
sale in February 1995 (Marrion, 2003), we failed to find any term end point product that used a
crediting method which had a participation rate of less than 100% combined with both a cap and
a yield spread greater than zero. Indeed, in reviewing all of the product information we have assembled
since 1995, the only annuity we found which had a participation rate of less than 100%
that could change each year and deducted a yield spread or asset fee and had a cap was the
Americo FlexPlus annuity marketed around the turn of the century. However, it did not use a
term end point design; instead this product used an annual reset or ratchet design, the performance
of which differs radically from a term end point structure (Marrion, 1996, 1997, 1998,
1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007).

Often a financial columnist or an occasional other writer will dismiss the index annuity concept
by proposing that a consumer purchase a long-term zero-coupon bond together with an index
fund instead of an index annuity (Clements, 2005; Pressman, 2007; Warner, 2005; McCann and
Luo, 2006). These columnists and other writers often posit the term end point crediting method
as the representative interest crediting structure. However, all term end point designs account for
less than 4.5% of sales over the last four years and term end point design using two crediting
components represents even less (Marrion, 2006, 2007; Moore, 2008, 2009). Indeed, Collins,
Lam and Stampfli (2009) base their conclusions on a term end point that uses a cap, but less than
1% of the products have ever placed a cap on a term end point crediting method (Marrion, 2009).
Such a product is certainly not representative of index annuity crediting methods in practice.

The assumed index participation rates may also not be representative. For example, for their
chart of seven-year periods starting in December 1988 and with the final seven-year period beginning
in December 2000, Collins, Lam and Stampfli (2009) assume a term end point participation
rate of 70% to 75%, depending upon whether the seventh-year index values are averaged,
and place an 8% cap on any yearly gain. Since index annuities were not around until the mid-
1990s we cannot decisively state what rates would have been for the early years used. However,
one can gather the actual participation rate data from when products did appear. We can state
that based on actual FIA’s offered, if you had purchased every available index annuity using a
term-end point annuity with a seven-year term on the first business day of each month from
January 1997 through December 2000 your average participation rate would have been 72%
without a cap (Marrion, 1997, 1998, 1999, 2000).ii

Looking at “representative” annual reset methods, Collins, Lam and Sampfli (2009) assume 55%
index participation with a 7% annual cap or 60% averaged index participation with a 7.5% cap.
McCann (2008) compares returns from 1990 through 2007 of the S&P 500 with a hypothetical
annual reset point-to-point design that assumes a constant 6.5% cap. However, in reviewing actual
new money rates for annual reset designs from 1996 to the present, one would have encountered
effective participation this low at only a few points in 2003 and 2004 and in 2007 and
2008. Indeed, many averaging products were offering 100% first-year participation without a cap
in the late ‘90s, and many annual point-to-point products have offered 100% participation allowing
for possible double-digit gains (Marrion, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003,
2004, 2005, 2006, 2007)

Wharton Financial Institutions Center

There is nothing wrong with showing how a term end point method might have performed under
these assumptions. However, we must keep in mind that the results of the study are not representative

of FIA’s performance, as they depend upon a crediting rate method not used in over 95%
of sales, and combinations of other contract features not observed in practice.

Dubious Assumptions

#1 Participation Rates and Caps Never Change

Collins, Lam and Stampfli (2009) assumed an averaging method had a 60% participation rate
with a 7.5% cap and applied it to the past. McCann (2008) assumed a constant 6.5% cap for all
of his index annuity performance calculations, which appears to have been a cap on the date his
story was completed, when interest rates were heading toward historic lows. On the day he completed
his story the constant maturity rate of a 10-year U.S. Treasury Note was 3.64%; by contrast,
during the 1990 until 2000 period (within the time frames of both studies) the 10-year
Treasury rate was nearly twice as high, averaging 6.66% (Federal Reserve Board, 2009). Lewis
(2005) assumed either a 5% or 9% cap on an annual reset design and ignored the interest rate environment
that might change these caps, but allowed for the returns to positively affect the T-bill
comparison he made. Higher bond yields generate more interest income thus allowing carriers to
buy or synthesize more options to increase index participation, which is why some annual pointto-
point products were able to offer 100% participation and 14% caps in the previous decade
(Marrion, 1996)
.
Lewis (2005), McCann (2008) and Collins, Lam and Stampfli (2009) assume constant index annuity
participation holding rates, caps and spreads steady over long periods of time. The flaw is
this does not take into account the real world effect of changes in interest rate environments and
market volatility’s effect on the cost of providing the index participation. One cannot assume today’s
rate would have existed in the past because the financial conditions of the past were often
quite different. One cannot simply posit a participation rate or cap on crediting rates, hold it constant,
and then attempt to make conclusive comparisons with actual stock index returns. Clearly
the reach of the conclusions is limited by the unrealistic assumptions underlying the annuity
modeled.

Not every study adopts these simplifying assumptions. Gaillardetz and Lin (2006) note that when
interest rates increase participation rates also go up, unless offset by increased volatility. One
carrier suggested that the uncapped guaranteed participation rates on their seven-year averaging
annual reset product from 1980 through 1995 would have ranged from 135% to 260% based on
bond yields and call option prices in effect (Physicians Life, 1996). They understand that index
participation is driven by bond yields and option costs and these change over time.

#2 Annual Stock Market Returns of 17.6% Are Normal

Collins, Lam and Sampfli (2009) mention that many attempts to show index annuity comparisons
are exercises in data mining and we quite agree. One way to data mine is to make long-term
predictions based on using low participation rates that do not represent the reality of long-term
rates. Another is to intentionally select periods that favor one choice over another.

McCann (2008) makes a performance comparison over a 30-year period that happens to start in a
year with the lowest end-of-year S&P 500 value over the previous 45 years. Using the correct
December 2004 index values, the annualized growth rate of the S&P 500 for McCann’s selected
comparison period is 10.05%. By contrast, the S&P 500 growth rate from December 1954 to December
1984, another 30-year period, was 5.25%, and the average annual growth from December
1964 to December 1994 was 5.79%.

In the 30-year period that McCann selected for constructing his comparisons, the S&P 500 ended
at 1211.92. If you used a monthly averaged annual reset method to compute where a monthly
averaged S&P 500 would have ended at you get an ending value of 591, which is 49% of the actual
S&P 500 level. By contrast, if your 30-year period ends December 1984 the S&P 500 level
is 167.24; however, the monthly averaged S&P 500 computed value is 161.37, almost equal to
the actual S&P 500 level. Many performance comparisons pit index annuities against stock market
investments over the ‘80s and ‘90s when stock market returns averaged 17.6% and ignore the
preceding eight decades with their average return of 8.5% (Bogle, 2003).

#3 Stock Market Returns Conform to a Normal Distribution, Interest Rates and Volatility Are Constant

A more egregious problem in some of the studies that simply simulate hypothetical stock market
return scenarios in order to generate hypothetical policy crediting rates is that the simulations are
often based on an assumed distribution of stock returns that cannot be supported. For example,
McCann and Luo (2006) have conducted studies of hypothetical crediting rate behavior assuming
that equity market rates of return conform to a Normal distribution. When Babbel, Herce and
Dutta (2008) re-examined that study but used an empirical distribution which matched the historical
record, while keeping in tact all of the other assumptions of McCann and Luo, they found
that annual crediting rates in the range of 5-15% were about twice as common as what were being
credited under the Normal assumption. This implies that FIA’s were far more valuable than
was being represented under the hypothetical distribution of stock market returns.
In a similar vein, several studies assume that interest rates and volatility are constant throughout
an annuity’s life, in order to construct their performance comparisons. Of course the simplifying
assumption has never occurred in the marketplace, and the alternative investments to which
FIA’s are compared have their returns affected by interest rate movements as well as volatility
changes.

#4 Managerial Discretion Is Not Involved

Over 95% of index annuity sales are in products that may change at least one element of their
interest crediting methodology after the reset period. Two primary factors affecting subsequent
index participation are bond yields and the price of call options (Gaillardetz and Lin, 2006).
However, the ultimate determining factor in setting index participation in future years is not the
interest rate environment or the cost of options, it is what carrier management decides to do. This
human element introduces a random variable that cannot be quantified, thereby making any attempt
to project any returns ultimately subjective.

Reality

Index annuities have been producing returns since the first one was purchased on February 15,
1995. Unfortunately, most of the articles and studies ignore these data and attempt to portray
how index annuities should have performed while ignoring actual results. What we show below
are actual results. They are not intended to be a prediction of how index annuities will perform in
the future, nor are the results intended to be representative of overall industry performance. They
results are what they are. Our data set does have limitations, which we describe presently so that
readers may draw their own conclusions.

Annualized Five-Year Returns

Period S&P return FIA avg. return Number of FIA’s Return Range
1997-2002
1998-2003
1999-2004
2000-2005
2001-2006
2002-2007
2003-2008
9.39%
-0.42%
-2.77%
-3.08%
5.11%
13.37%
3.18%
9.19%
5.46%
4.69%
4.33%
4.36%
6.12%
6.05%
5
13
8
28
13
23
19
7.80% to 12.16%
3.00% to 7.97%
3.00% to 6.63%
0.85% to 8.66%
1.91% to 6.55%
3.00% to 8.39%
3.00% to 7.80%

These results are based on copies of actual customer statements received with personal information
blacked out, for each of the preceding five-year periods, requested on an annual basis since
2002. The return data reflect contract periods closest to 30 September with the exception of the
1997-2002 period that uses a 2 January date. The returns reflect the results of products with term
end point, high water mark, and annual reset designs with and without crediting rate caps, and
with and without averaging. The returns do reflect any fees charged, but not surrender penalties.
Annuitization was not required to receive these returns. Initial premium bonuses, if any, were
reflected only if immediately available as cash values (did not require vesting or annuitization).

There are several limitations with the data above. The main one is that they are derived from carriers
that chose to participate and that chose the products for which they reported returns. This
could have imparted some bias in returns, and may differ from what a larger, more random sample
would have produced for the periods. Although some of the annuities had contract years ending
on the 30th, the contract anniversaries encompassed a three-week range around that end date.
The data collected are very few for some periods. And the data reflect results across a very small
spectrum of time, only looking at 1997-2008 and then only at one day out of each year. Nonetheless,
the 109 contracts for which we have data are real contracts and reflect actual crediting rates
that were provided to annuity owners over time under twelve different crediting rate structures
used in FIA designs.

From 1997 through 2007 the five-year annualized returns for FIA’s averaged 5.79%. This compares
to 5.39% for taxable bond funds and 4.73% for fixed annuities. The FIA and taxable bond
fund provided a negative correlation of 0.11 which is a very important consideration for invest
ing and asset allocation to work effectively. The FIA may be considered a separate asset class.
The authors support the concept of principal protected investments being their own asset class
due to removing the negative side of the two-tailed distribution and providing for variability in
upside performance with guaranteed minimum returns which sets the overall earnings at maturity
of the FIA contract above zero.

This next data set reflects the actual real-world total five-year returns credited to annuityowners
for an annual point-to-point with cap structured index annuity assuming an annuity is purchased
on the 21st of every month beginning April 1996 with a final purchase on December 2003. This
annuity was selected because it has been steadily offered every month for 13 years and its performance
is publicly available. It is not intended to be representative of anything except itself.
The chart below compares the FIA returns with the total returns of the S&P 500 over the same
period, and a blended return composed of 50% of the S&P 500 total return and 50% of the compounded
return for a series of one-year, U.S. constant maturity T-bills. We have not deducted
from these alternative portfolios any of the annual expenses that typify mutual funds, thereby
biasing the comparison to favor mutual funds.

Collins, Lam and Stampfli (2009) attempted to predict the future by using the past and creating
“a rich set of probable future results [that] is available for inspection.” Based on these “probable”
futures they found the index annuity minimum guarantee to be beneficial at times, but that the
index annuity payoff “always lags the investment portfolio’s payoff for returns.” McCann (2008)
created his own hypothetical annuity structure and in the future he created, he stated that “99.8%
of the time the investor would be better off with the Treasury securities and stocks than with the
equity-indexed annuity.” However, if your future was the actual period from April 1996 through
December 2008, and you had purchased this real-world-still-being-marketed index annuity
month after month, the not-pretend index annuity results bested the S&P 500 alone 66% of the
time and a 50/50 mix of one-year Treasury Bills and the S&P 500 80% of the time.

Liquidity and Risk

According to Collins, Lam and Stampfli (2009), FIA’s are not liquid investments and have “formidable”
surrender charges. The authors failed to take into account the various free withdrawal
provisions in all FIA’s. Generally a 10% withdrawal is allowed annually without surrender penalty
and some firms offer more standard withdrawal provisions. That is about triple what you can
withdraw from a Treasury bond portfolio in today’s interest rate climate without subjecting yourself
to losses of principal occasioned by bond price fluctuations, and even more so when the alternative
portfolio includes common stock. Most articles analyzing appropriate withdrawal rates
for retirees range in the 4-6% range annually, depending upon various methods of thought. This
being said, a 10% withdrawal privilege should not be an issue for most retirees and individuals.

Nearly all FIA’s provide a full surrender value upon death of the owner or annuitant. Many FIA
issuers offer full surrender for nursing home stays, extended hospital visits and terminal illness
(VanderPal, 2008). Several carriers offer full surrender for unemployment if under 65 years of
age. The surrender charges when applied outside of the free withdrawal provisions typically depend
on the minimum term of the annuity and whether any bonuses are paid, and usually decline
each following year. Another difference is that in the case of a non-qualified annuity purchase,
the accumulation value grows tax deferred, whereas with a non-qualified portfolio of stocks and
bonds, taxes are incurred along the way. Babbel and Reddy (2009) have shown that the difference
between these two tax treatments can ultimately produce after-tax income potential from
the annuity that would require alternative taxable mixes of stocks and bonds to produce annual
returns that must be substantially higher than the annuity returns in order to provide for an
equivalent after-tax income.iii This is another missing element in our comparison that biases the
result in favor of the alternative portfolio. Moreover, FIA’s in almost all states are protected from
creditors and against seizure in situations of litigation, which is not typically true of stock and
bond mutual funds unless held in a protected vehicle.

FIA opponents commonly cite surrender fees as an issue. First, with the various free withdrawal
privileges and based on the appropriate range of annual withdrawals, most individuals who purchase
an FIA will not encounter a penalty except through their choice. Second, surrender fees are
required by state insurance regulators in order for policies to be qualified for sale. The existence
of surrender fees helps an insurer recapture up-font costs on products that were designed to be
held for several years, and protects persisting policies from the imposition of extra costs by those
who choose to surrender early. Third, the idea that securities do not have penalties is not only
flawed but simply not accurate. Even if the actual mutual fund one is holding does not assess surrender
charges, it is subject to annual management fees and market risk. Bogle (2005) has shown
these costs of “financial intermediation” are non-trivial over time. If your mutual fund or investments
decline in value 20% and that investor is making withdrawals for income, this may become
a catastrophic event for the investor. Remember that the more an investment declines, exponentially, the more the investment must go up to simply recover and adding withdrawals to the
scenario can exacerbate a potential catastrophic event (VanderPal, 2008). Furthermore, FIA’s
provide a guaranteed minimum return along with principal preservation which mutual funds and
other similar investments do not provide.

The S&P 500 index as of August of 2009 finally reached 1,000. It has taken 12 years for the
S&P 500 index to break even due to the volatility and risk with the two economic bubbles experienced
from technology stocks and the real estate crisis. While the S&P 500 index has produced
near zero total return over 12 years, the FIA using the S&P 500 index on average produced returns
of 5.79% using a 5-year annualized rolling return from 1997-2007. Even if you add taxable
dividends to the index, the FIA has performed better, at least based on the data we have reviewed.

Fees and Expenses

“Although FIAs do not provide complete participation in an index, based on various crediting
methods and market anomalies, returns may actually be better over time than in mutual funds or
variable annuities. Consider that variable annuities with mortality and administration expenses
(M&E), sub-account management fees and other various charges can account for up to 4.00% of
annual expenses that erode market returns on variable annuities” (VanderPal, 2008). According
to Morningstar the average mortality and expense and management fees are 2.08%. For example,
a variable annuity sub-account that earned 10% in the market would net less than 8% to the client’s
account after internal fees are deducted from earnings. Unlike mutual funds, an FIA does
not deduct sales charges, management fees or 12b-1 marketing fees. Instead, the insurance company
uses a small amount from the underlying portfolio which lowers participation in the market
index to cover administrative costs and commissions to brokers (VanderPal, 2008). Because the
FIA provides policy crediting rate formulae and periodic annuityowner reports net of any fees
and management expenses, it does not separately disclose them.

Consumer Risk Aversion

Finally, most of the aforementioned fixed indexed annuity studies have failed to take into account
the level of risk aversion of an individual consumer. An exception to this pattern is the
study of Babbel, Herce and Dutta (2008) that explicitly takes into account the level of consumer
risk aversion. Using the criteria of multiperiod utility analysis, they find that for moderate and
strongly risk-averse individuals, the fixed indexed annuity is judged superior in performance to
various combinations of stocks and bonds. This is not surprising because a risk-averse consumer
will penalize an investment alternative that does not avoid downside risk in a quest to achieve
superior returns. Because FIA’s are designed in a way to avoid downside risk, they tend to produce
preferred return patterns for such consumers when compared to alternative investment
strategies that expose consumers to significant levels of that risk.

Conclusion

Much of the analysis published on index annuities is based on hypothetical returns that are generated
by using selected time periods and crediting criteria to produce the preordained conclusion
desired. If the analysis is produced for the annuity industry the conclusion is positive, if it is directed
towards the securities industry it is negative. The reality is at least some index annuities
have produced returns that have been truly competitive with certificates of deposit, fixed rate annuities,
taxable bond funds, and even equities at times (Marrion, 2008). How will index annuities
perform in the future? We do not know but the concept has proven to work in the past and any
articles should reflect this. FIAs were not designed to be direct competitors of index investing
nor have FIAs been promoted to provide returns to compete with equity mutual funds or ETFs.
The FIA is designed for safety of principal with returns linked to upside market performance.

References

Babbel, David F. and Ravi Reddy. 2009. “Measuring the Tax Benefit of a Tax-Deferred Annuity.” Journal
of Financial Planning 22, 10 (October).
Babbel, David F., Migel A. Herce, and Kabir Dutta. 2008. “Un-Supermodels and the FIA.” Presentation
given at the Morningstar- Ibbotson Associates / IFID Centre Retirement Income Products Executive
Symposium, University of Chicago, November 11; the slides presentation is available at:
http://corporate.morningstar.com/ib/documents/UserGuides/UnSupermodelsFIA.pdf and the video presentation
at: http://corporate.morningstar.com/ib/tools/David_Babbel/tape2b.html
Bogle, John C. 2005. “The Relentless Rules of Humble Arithmetic.” Financial Analysts Journal 61, 6
(November/December).
Bogle, John C. 2003. “The policy portfolio in an era of subdued returns.” Speech before the Investment
Analysts Society of Chicago and The EnnisKnupp Client Conference. Chicago, IL. June 5. Bogle Financial
Markets Research Center. http://www.vanguard.com/bogle_site/sp20030605.html
Collins, Patrick J., Huy Lam, and Josh Stampfli. 2009. “Equity Indexed Annuities: Downside Protection,
But at What Cost?” Journal of Financial Planning 22, 5 (May).
Clements, Jonathan. 2005. “A do-it-yourself kit for investors: Build your own equity-indexed annuity.”
Wall Street Journal. January 26: D.1.
Crittenden, Eric and Col Wilcox. 2008. “The Capitalism Distribution – The Realities of Common Stock
Returns.” BlackStar Funds. http://info@blackstarfunds.com/files/TheCapitalismDistribution.pdf
Fama, Eugene. 1965. “The Behavior of Stock-Market Prices.” Journal of Business 38, 1 (January).
Federal Reserve Board of Governors. “10-Year Treasury Constant Maturity Rate. H.15. 2009-06-02 9:06
AM CDT Release.”
Gaillardetz, Patrice, and X Sheldon Lin. 2006. “Valuation of equity-linked insurance and annuity products
with binomial models.” North American Actuarial Journal 10, 4 (October).
Green, James. 2009. “2008 Sales of Variable Annuities Faltered; Fixed Sales Soared.” Investment Advisor
Magazine (April).
Koco, Linda. (2009) “2008 FIA Sales Seen Rising 6.2%.” National Underwriter 13, 5 (March).
Lewis, W. Cris. 2005. A return-risk evaluation of an indexed annuity investment. The Journal of Wealth
Management 7, 4 (Spring).

Mandelbrot, Benoît. 1963. “The variation of certain speculative prices.” Journal of Business 36, 4 (October).
Marrion, Jack. 2009. “Product Trends.” Index Compendium. Advantage Compendium, Ltd. 13, 7.
Marrion, Jack. 2008. “Fixed annuities are competitive with taxable bond mutual funds.” Index Compendium
12, 2.
Marrion, Jack. 2003. Index Annuities: Power & Protection. Advantage Group. St. Louis.
Marrion, Jack. 2002. “Interest crediting concepts.” Index Compendium. Advantage Compendium, Ltd. 6,
3.
Marrion, Jack. 1996-2000. Index Annuities Report. Advantage Compendium, Ltd.
Marrion, Jack. 1996-2007. Advantage Index Product Sales & Market Report. Advantage Compendium,
Ltd. Volumes 1-39.
McCann, Craig J. 2008. “An Economic Analysis of Equity-Indexed Annuities.” Securities Litigation &
Consulting Group, Inc. September 10.
McCann, Craig J. and Dengpan Luo. 2006. “An Overview of Equity-Indexed Annuities.” Securities Litigation
& Consulting Group, Inc. June.
Moore, Sheryl. 2007-2009. Advantage Index Product Sales & Market Report. AnnuitySpecs.com. Volumes
40-46.
Physicians Life Insurance Company. 1996. Vista 500 Market Index Annuity Producers Guide, p.15.
Pressman, Aaron. 2007. “Retirement made complicated; why equity-indexed annuities have a bad name
and what investors need to know.” Business Week. Sep 24, Issue 4051; pg. 98.
Richardson, M. T. 2009. The Ivy Portfolio. Hoboken: John Wiley & Sons, Inc.
Taleb, N. N. 2007. The Black Swan:The Impact of the Highly Improbable. London: Penguin Books.
VanderPal, Geoffrey. (2008) “Equity Index Annuities.” Journal of Personal Finance 7, 2.
VanderPal, Geoffrey. (2004) “The Advantages and Disadvantages of Equity Index Annuities.” Journal of
Financial Planning 17, 1 (January).
Warner, Joan. 2005. “EIAs: Behind the hype: Equity-indexed annuities are flying off the shelves, but they
carry risks that regulators fear are not fully disclosed.” Financial Planning (October).

Endnotes

i A recent confirmation of this finding is in Babbel, Herce and Dutta (2008). In their study, the authors
found that there was less than one chance in a million that monthly stock market returns from 1926-2008,
and various sub-periods during that time interval, conform to a Normal distribution, whether measured by
a Jarque-Bera, an Anderson-Darling, or a Kolmogorov-Smirnov goodness of fit test.
ii To be precise, the average term end point participation rates for seven-year periods were: 1997-87%,
1998-71%, 1999-61%, 2000-70%.
iii Their study showed that an alternative portfolio would have to generate an additional pre-tax return that
in some cases reached over 200 basis points per year. The ultimate size of the tax benefit from tax deferral
depends on the length of time the annuity is held during the accumulation and decumulation phases of
ownership, whether a deferred annuity is annuitized at the end of the surrender period, or taken as a lump
sum distribution, the level of yields net of expenses, the marginal tax rates on ordinary income of the investor,
and the differential between tax rates on ordinary income and tax-preferred treatment of dividends
and capital gains. McCann and Luo (2006) claimed that the benefits of tax deferral were “de minimis.”

Wharton Financial Institutions Center

www.AnnuityDefinition.com

Technorati Tags: equity index annuity, indexed annuities, fixed index annuity, index annuities, fixed indexed annuities, deferred annuity, life annuity

Five Fatal Flaws of Trading

2009-07-03T09:43:00.001-07:00

By Jeffrey Kennedy

Close to ninety percent of all traders lose money. The remaining ten percent somehow manage to either break even or even turn a profit – and more importantly, do it consistently. How do they do that?

That's an age-old question. While there is no magic formula, one of Elliott Wave International's senior instructors Jeffrey Kennedy has identified five fundamental flaws that, in his opinion, stop most traders from being consistently successful. We don't claim to have found The Holy Grail of trading here, but sometimes a single idea can change a person's life. Maybe you'll find one in Jeffrey's take on trading? We sincerely hope so.

The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection. For a limited time, Elliott Wave International is offering Jeffrey Kennedy’s report, How to Use Bar Patterns to Spot Trade Setups, free.

Why Do Traders Lose?

If you’ve been trading for a long time, you no doubt have felt that a monstrous, invisible hand sometimes reaches into your trading account and takes out money. It doesn’t seem to matter how many books you buy, how many seminars you attend or how many hours you spend analyzing price charts, you just can’t seem to prevent that invisible hand from depleting your trading account funds.

Which brings us to the question: Why do traders lose? Or maybe we should ask, 'How do you stop the Hand?' Whether you are a seasoned professional or just thinking about opening your first trading account, the ability to stop the Hand is proportional to how well you understand and overcome the Five Fatal Flaws of trading. For each fatal flaw represents a finger on the invisible hand that wreaks havoc with your trading account.

Fatal Flaw No. 1 – Lack of Methodology

If you aim to be a consistently successful trader, then you must have a defined trading methodology, which is simply a clear and concise way of looking at markets. Guessing or going by gut instinct won’t work over the long run. If you don’t have a defined trading methodology, then you don’t have a way to know what constitutes a buy or sell signal. Moreover, you can’t even consistently correctly identify the trend.

How to overcome this fatal flaw? Answer: Write down your methodology. Define in writing what your analytical tools are and, more importantly, how you use them. It doesn’t matter whether you use the Wave Principle, Point and Figure charts, Stochastics, RSI or a combination of all of the above. What does matter is that you actually take the effort to define it (i.e., what constitutes a buy, a sell, your trailing stop and instructions on exiting a position). And the best hint I can give you regarding developing a defined trading methodology is this: If you can’t fit it on the back of a business card, it’s probably too complicated.

Fatal Flaw No. 2 – Lack of Discipline

When you have clearly outlined and identified your trading methodology, then you must have the discipline to follow your system. A Lack of Discipline in this regard is the second fatal flaw. If the way you view a price chart or evaluate a potential trade setup is different from how you did it a month ago, then you have either not identified your methodology or you lack the discipline to follow the methodology you have identified. The formula for success is to consistently apply a proven methodology. So the best advice I can give you to overcome a lack of discipline is to define a trading methodology that works best for you and follow it religiously.

Fatal Flaw No. 3 – Unrealistic Expectations

Between you and me, nothing makes me angrier than those commercials that say something like, "...$5,000 properly positioned in Natural Gas can give you returns of over $40,000..." Advertisements like this are a disservice to the financial industry as a whole and end up costing uneducated investors a lot more than $5,000. In addition, they help to create the third fatal flaw: Unrealistic Expectations.

Yes, it is possible to experience above-average returns trading your own account. However, it’s difficult to do it without taking on above-average risk. So what is a realistic return to shoot for in your first year as a trader – 50%, 100%, 200%? Whoa, let’s rein in those unrealistic expectations. In my opinion, the goal for every trader their first year out should be not to lose money. In other words, shoot for a 0% return your first year. If you can manage that, then in year two, try to beat the Dow or the S&P. These goals may not be flashy but they are realistic, and if you can learn to live with them – and achieve them – you will fend off the Hand.

For a limited time, Elliott Wave International is offering Jeffrey Kennedy’s report, How to Use Bar Patterns to Spot Trade Setups, free.

Fatal Flaw No. 4 – Lack of Patience

The fourth finger of the invisible hand that robs your trading account is Lack of Patience. I forget where, but I once read that markets trend only 20% of the time, and, from my experience, I would say that this is an accurate statement. So think about it, the other 80% of the time the markets are not trending in one clear direction.

That may explain why I believe that for any given time frame, there are only two or three really good trading opportunities. For example, if you’re a long-term trader, there are typically only two or three compelling tradable moves in a market during any given year. Similarly, if you are a short-term trader, there are only two or three high-quality trade setups in a given week.

All too often, because trading is inherently exciting (and anything involving money usually is exciting), it’s easy to feel like you’re missing the party if you don’t trade a lot. As a result, you start taking trade setups of lesser and lesser quality and begin to over-trade.

How do you overcome this lack of patience? The advice I have found to be most valuable is to remind yourself that every week, there is another trade-of-the-year. In other words, don’t worry about missing an opportunity today, because there will be another one tomorrow, next week and next month ... I promise.

I remember a line from a movie (either Sergeant York with Gary Cooper or The Patriot with Mel Gibson) in which one character gives advice to another on how to shoot a rifle: 'Aim small, miss small.' I offer the same advice in this new context. To aim small requires patience. So be patient, and you’ll miss small."

Fatal Flaw No. 5 – Lack of Money Management

The final fatal flaw to overcome as a trader is a Lack of Money Management, and this topic deserves more than just a few paragraphs, because money management encompasses risk/reward analysis, probability of success and failure, protective stops and so much more. Even so, I would like to address the subject of money management with a focus on risk as a function of portfolio size.

Now the big boys (i.e., the professional traders) tend to limit their risk on any given position to 1% - 3% of their portfolio. If we apply this rule to ourselves, then for every $5,000 we have in our trading account, we can risk only $50-$150 on any given trade. Stocks might be a little different, but a $50 stop in Corn, which is one point, is simply too tight a stop, especially when the 10-day average trading range in Corn recently has been more than 10 points. A more plausible stop might be five points or 10, in which case, depending on what percentage of your total portfolio you want to risk, you would need an account size between $15,000 and $50,000.

Simply put, I believe that many traders begin to trade either under-funded or without sufficient capital in their trading account to trade the markets they choose to trade. And that doesn’t even address the size that they trade (i.e., multiple contracts).

To overcome this fatal flaw, let me expand on the logic from the 'aim small, miss small' movie line. If you have a small trading account, then trade small. You can accomplish this by trading fewer contracts, or trading e-mini contracts or even stocks. Bottom line, on your way to becoming a consistently successful trader, you must realize that one key is longevity. If your risk on any given position is relatively small, then you can weather the rough spots. Conversely, if you risk 25% of your portfolio on each trade, after four consecutive losers, you’re out all together.

Break the Hand’s Grip

Trading successfully is not easy. It’s hard work ... damn hard. And if anyone leads you to believe otherwise, run the other way, and fast. But this hard work can be rewarding, above-average gains are possible and the sense of satisfaction one feels after a few nice trades is absolutely priceless. To get to that point, though, you must first break the fingers of the Hand that is holding you back and stealing money from your trading account. I can guarantee that if you attend to the five fatal flaws I’ve outlined, you won’t be caught red-handed stealing from your own account.

For more information on trading successfully, visit Elliott Wave International to download Jeffrey Kennedy’s free report, How to Use Bar Patterns to Spot Trade Setups.

Jeffrey Kennedy is the Chief Commodity Analyst at Elliott Wave International (EWI). With more than 15 years of experience as a technical analyst, he writes and edits Futures Junctures, EWI's premier commodity forecasting package.

Immediate Annuities - Lifetime Income

2009-07-03T09:10:00.001-07:00

Immediate Fixed Annuity - FIXED INDEX ANNUITY DEFINITION
Income NOW riders on fixed annuities are the most flexible. You are NOT annuitizing and the income can increase when the fixed annuity increases. The income can be stopped and restarted. If the fixed annuity yields 8% one year, you can take that out instead of the income rider payment. You'll enjoy much more potential and a guaranteed income. Fixed annuities can easily be annuitized (immediate annuity) in the future if base interest rates increase substantially as they did briefly in the early 80's. The year 1982 was the best time to buy a life income annuity also known as an immediate annuity.

Equity Index Annuities: Great Idea Or Flawed Flop?

2009-06-17T08:24:00.001-07:00

NAFA Responds to Inaccuracies in IndexUniverse.com Article
Equity Index Annuities: Great Idea Or Flawed Flop?
Written by Jeremy Burger
IndexUniverse.com
Wednesday, 10 June 2009
It is hard to understand why IndexUniverse.com would choose to publish an article filled with
misleading information and factual errors when its stated goal is to provide the “industry's best
news, columns, research, and features and the website aims to be “educational, thoughtprovoking,
and, rigorously independent in perspective.” Since fixed indexed annuities have an
interest crediting formula that is calculated using an index, we thought your readers might be
interested in the facts rather than the article’s reiteration of the same errors made by those in
the investing world. NAFA hopes this information helps IndexUniverse.com meet its goals by
publishing this clarification of information and, in so doing, achieve our mutual aim of aim of
education and independence
Error #1
Some policies make you wait as long as 20 years and charge you 20 percent for first-year
withdrawals.
The Facts:
1. There are 273 products available today and the maximum surrender period is 16 years
NOT 20.
2. The majority (82%) have surrender charge periods of 10 years or less.
3. 2/3rds of the products with surrender periods of 14-16 years (less than 1/10th of the total
products available) offer interest rate bonuses up front.
4. Only one product charges 20% surrender charge in the first year and that product also
pays the customer a 10% premium bonus on all premiums paid in the first year, making
the net charge roughly 10%. This product also automatically adds a Lifetime Income
Benefit Rider that guarantees annual withdrawals. Many consumers have decided that a
bonus and guaranteed income are benefits worth considering in exchange for
committing to a longer surrender period. Had Mr. Burger done more initial research, he
would have found that most states have adopted the latest NAIC annuity standard nonforfeiture
law which does not allow net surrender charges at the level he excoriates.
Error #2
Your guaranteed minimum return… probably doesn’t apply to the full balance in your
account.
The Facts:
Mr. Burger’s error is often made by those who write for the investment world because they
typically do not understand the insurance element of guaranteed minimum interest.
The minimum guarantee is in indexed annuity productsi provide a minimum guarantee that is a
minimum interest calculation (based on the state’s non-forfeiture law) such as 2 or 3% on 90%
of premiums or the contract’s current account value, whichever is greater1. The minimum
1 Based on the products currently available.

Immediate Annuity-The Retirement Security Needs Lifetime Pay Act, H.R. 2748

2009-06-13T09:59:00.001-07:00

Congressman Earl Pomeroy -- Pomeroy, Brown-Waite Introduce Legislation to Promote Income Security in Retirement

Pomeroy, Brown-Waite Introduce Legislation to Promote Income Security in Retirement
Monday, June 08, 2009

Washington, D.C. – Congressman Earl Pomeroy today introduced bipartisan legislation along with Rep. Ginny Brown-Waite (R-FL) that will promote lifetime income security by providing incentives for workers to annuitize part of their retirement savings.

“For years, the federal government has recognized its duty to assist American families in building a retirement nest egg,” Pomeroy said. “Saving and investing for the long term is extremely important, especially in these challenging times. A greater retirement challenge lies ahead: managing assets to make sure that your retirement savings last a lifetime. The Retirement Security Needs Lifetime Pay Act will provide families with incentives to plan for a secure lifelong retirement.”

“American workers spend a significant portion of their careers planning for their retirement. When the economy falls on hard times, it should not mean that their plans have to go on hold as well,” Congresswoman Brown-Waite said. “This bill incentivizes workers to invest in a retirement annuity so that their golden years can go on as planned.”

The Retirement Security Needs Lifetime Pay Act, H.R. 2748, would encourage workers to annuitize some of their retirement savings by providing a 50 percent tax exclusion for up $10,000 of lifetime annuity payments each year. A lifetime annuity is the only financial vehicle that delivers a steady stream of income for life. Additionally, the bill would exclude from taxes, 25 percent of lifetime income payments from Individual Retirement Accounts (IRAs), qualified plans and similar employer-sponsored retirement savings plans other than defined benefit plans. The bill also excludes the value of longevity insurance from amounts subject to required minimum distributions and clarifies the taxation of partial annuity payments.

By providing incentives for workers to annuitize part of their retirement savings, this bill addresses the management of savings once an individual reaches retirement, an issue previously ignored by public policy. Congress has gone to great lengths to provide incentives to encourage workers to accumulate enough savings for retirement. However, upon retirement, workers face numerous risks in managing those savings throughout their retirement years.

AnnuityDefinition.com

Index Annuity: Forbes Article Errors, Omissions and Half-Statements

2009-06-10T05:45:00.001-07:00

Equity‐Indexed Annuities: A Costly Way to Limit Your Lossesi Strong recent results mask plenty of pitfalls.
By Scott Woolley
June 05, 2009
Forbes.com
NAFA, the National Association for Fixed Annuities, is an educational trade association incorporated to
promote the awareness and understanding of fixed annuities. The common media malady is that fixed
annuities – regardless of the interest crediting formula – are investment products. Fixed annuities are
no more purchased as investments than are life or long term care insurance ‐ nor should they be. All of
these products are purchased to protect and preserve assets. Fixed indexed annuities offer guaranteed
death benefits, minimum interest and income you cannot outlive. Fixed indexed annuities can also
provide additional interest over and above the guarantees when the index performance allows.
The headline demonstrates a complete misunderstanding of these products. They do not “limit your
losses” from stock market declines they ELIMINATE the possibility that any of your premium or earned
interest will be lost. While the list of errors, omissions and half‐statements in this article is very lengthy
indeed, we will limit our corrections to the most egregious ones. Helping Americans to better
understand fixed index annuities will encourage them to learn more about a product that has saved
millions of dollars of retirement savings from equity losses.
1. A major error in the article is the assertion that fixed indexed annuities are offered by Prudential
and Met Life. Neither company offers a fixed indexed annuity. Prudential offers only one choice
of a fixed deferred annuity product and Met Life offers two (single and flexible premium)
product choices and none of these deferred annuities credit interest based on the performance
of an index. MassMutual's product is a single premium variable annuity where the purchase
payment is allocated between a fixed account and an equity indexed subaccount like the S&P
500. Genworth exited the indexed annuity marketplace in October 2008. It is curious that you
did not choose to inform your readers with company names and website links to the real “major
companies” that offer indexed annuities. Just about 15 minutes of research would have
informed you that the four companies you named are not fixed indexed annuity carriers.
2. The article itself contradicts FINRA’s statement about fixed indexed annuities that “one of the
most confusing features is the method used to calculate the gain.” The article easily explains
the feature using a mere 45 words.
3. The bias of the article is transparent when the only “regulatory authorities” referenced are the
two that are seeking to claim jurisdiction over a product they actually do not understand. While
NAFA certainly has views that differ from those quoted, an effort at objectivity should have
referenced our White Paper on Indexed Annuity Productsii, so that readers could draw their own
conclusions. Also, IMSAiii and the NAICiv also provide good information for consumers on their
respective websites.

4. It is good that you acknowledge that fixed indexed annuities show strong results, but why do
you limit it to recent history? Perhaps because during the recent economic crisis, while millions
of Americans have seen their 401(k) and retirements savings slashed in half, owners of fixed
indexed annuities have not lost one penny of their account value? But it is also true that the
tradeoff for this protection has also rewarded them with very respectable interest earnings.
Below is NAFA’s report by Miguel A. Herce, Ph.D of CRA International, Inc. showing the
annualized return over 10‐year periods. Many American’s might disagree that 6.5% is a “costly
way to limit losses.”
Period S&P 500 with no Dividends Monthly Averaging Index
(0% floor)
JAN 1975 – OCT 2004 11.6% 7.7%
JAN 1975 – OCT 2008 10.8% 7.5%
JAN 1926 – OCT 2008 7.6% 7.0%
JAN1995 – OCT 2008 6.1% 6.5%
If you are reluctant to take our word for it, perhaps you will trust the excerpt from a fellow journalist,
Steven Hartv, who writes:
If you are generally concerned with potential downswings in the market, then an index annuity
can be a great choice for your investing needs. You can participate in the potential of a strong
market run without having to deal with severe loss during a sharp market downturn. In addition,
the overall principal is safely protected so that no loss will occur. The setup of the index annuity
to give a profit at a minimum rate of return, however, ensures that the investor still sees a profit
(however small) during the lean times of the index. In other words, the index annuity seems to
provide the chance to have your cake and eat it too with a low‐risk financial product that you
can benefit from over time.
i http://resources.nafa.com/files/2009/06‐jun/6‐9‐forbesresponse.pdf
ii http://www.nafa.us/local_links.php?action=jump&catid=7&id=105
iii http://www.nafa.us/local_links.php?action=jump&catid=7&id=106
iv http://resources.nafa.com/files/2009/06‐jun/6‐9‐naicbuyersguidetoannuities.pdf
v http://www.affsphere.com/Money‐and‐Finance/Annuities/What‐is‐an‐Index‐Annuity‐1.html

Forbes Annuity Article "A Shocking Mistake. " Equity-Indexed Annuities: A Costly Way To Limit Your Losses

2009-06-09T12:29:00.000-07:00

From: Sheryl Moore
Sent: Monday, June 08, 2009 7:24 PM
To: 'readers@forbes.com'
Subject: FW: ARTICLE: Equity-Indexed Annuities: A Costly Way To Limit Your Losses

Dear Forbes Editor,

I am an independent market research analyst who specializes exclusively in the indexed annuity and indexed life markets. I have tracked the companies, products, marketing, and sales of these products for over a decade. I do not endorse any company or financial product specifically, but I do believe in the value proposition of indexed products. I recently had the occasion to read your article, “Equity-Indexed Annuities: A Costly Way To Limit Your Losses.” As the foremost authority on indexed annuities, I wanted to personally respond to the material misstatements and misleading testimonial by Scot Woolley in this article. I was absolutely appalled that a source as credible as Forbes would publish such a blatantly false and ignorant article. Scott Woolley appears to be very uneducated on indexed annuities, and the insurance industry in general. I would like to think that Forbes generally does a better job at monitoring the accuracy of their contributors’ articles than they did on this occasion.

Specifically, the most shocking and obvious mistake in Woolley’s piece is the fact that Massachusetts Mutual Life Insurance Co, and Prudential Financial have never offered indexed annuities, EVER. Yet, he sites them as being carriers that underwrite these products. In addition, MetLife does not offer indexed annuities themselves, but instead offers their agents a choice of four indexed annuities that are offered by other insurers. Genworth Financial exited the indexed annuity market on September 20, 2008. Certainly Woolley could not have done his homework on this article, as all one needs to do is Google “first quarter 2009 indexed annuity sales,” and they would have found the most credible resource on current carriers in the market: my firm’s sales data. It is distressing that this reporter put so little effort into backing-up his information.

In addition, indexed annuities have not been referred to as “equity indexed annuities” since the late 1990s. The insurance industry has been careful to enforce a habit of referring to the products as merely “indexed annuities” or “fixed indexed annuities,” so as not to confuse consumers. This industry wants to make a clear distinction between these fixed insurance products and equity investments. It is the safety and guarantees of these products which appeal to consumers, particularly during times of market downturns and instability (such as what we are experiencing now).

Also, indexed annuities are not a “combination investment and insurance product[s].” They are not an investment at all. They are a fixed insurance product that provides minimum guarantees, death benefits, and an income stream that consumers cannot outlive. Excess interest is credited based on the performance of an outside stock index, such as the S&P 500. The indexed annuity consumer is never directly invested in the stock market, and thereby never subject to the risk of loss due to market downturn. These benefits, coupled with this unique interest crediting, are what makes indexed annuities such an appealing, value-added product- particularly during times of market turmoil. The products are regulated by state insurance divisions, like other fixed insurance products.

Indexed annuities do provide limited upside interest potential, unlike securities products. This is what allows the insurance company to be able to afford the minimum guarantee that is provided to the consumer. So, regardless of the market’s performance, the worst the client can receive is zero interest crediting- no risk to principal as a result of market losses. No other product can offer such a strong value proposition, coupled with the insurance benefits of the indexed annuity. It is important to note that if the potential gains were unlimited on indexed annuities, there would be no guarantees, and THAT would be a variable annuity, not a fixed insurance product. We in the indexed annuity industry, are happy for this differentiation, as it is what drives the sales of these products.

Scott Woolley’s understanding of the basic pricing of indexed annuities is flawed. He believes that “the insurers who sell the annuities use derivatives to put collars around the annuities with limit both the upside and downside for investors.” In reality, the insurance company invests the majority of their funds in bonds, which cover the indexed annuity’s minimum guarantees. The invest a minute percentage of the funds in options, which provide the index-linked interest on the products. Contrary to Woolley’s allusions, the insurance companies have no control over the prices for the bonds and options. So, when the market becomes volatile, the same dollar that purchased the company a potential indexed annuity gain of 8% last month, may only purchase them a potential indexed annuity gain of 6% presently. So, while “the counterparties selling the hedges” may “jack up their fees,” as a result of market volatility, that merely translates into lower caps, participation rates, and higher spreads that are passed on to the consumer. This is not discretionary on behalf of the insurance company. Indexed annuities not only have minimum guarantees, but also minimum guaranteed caps/participation rates, and maximum spreads that are approved by the insurance divisions in the state the product is being offered in, prior to the product ever being made available for sale. When these caps, participation rates and spreads become unattractive compared to fixed annuities, sales of indexed annuities decline.

As far as “other fees” being “so high as to make the product a lousy buy”- indexed annuities do not have fees. A few indexed annuities offer an optional rider that has an explicit, stated account valued-based charge. However, these products are not like variable annuities which have numerous fees such as administrative fees, mortality & expense charges, as well as fees for optional riders. There are no “fat expenses” on these products, nor “ways to make it hard” to understand what you are really paying. All annuity costs and benefits are clearly disclosed in the disclosures that the consumer signs at the time of purchase. Yes, all indexed annuities have surrender charges. All fixed annuities have surrender charges. These charges are ten years on average, but can be as low as one year. In addition, a large percentage of the longer-term products offer an up-front premium bonus to provide an incentive to the annuity consumer. A surrender penalty is merely what allows the insurance company to credit competitive interest rates to the annuity, while the client has agreed to keep their money with the insurance company. The insurance company invests the consumers premiums, in order to make a return on the money, and credit this competitive interest rate. Without a surrender penalty, the insurance company would incur tremendous expenses that they would not be able to recover. In short, surrender charges are a pricing measure that allows insurance companies to make good on their promises, and back-up their claims-paying abilities.

Woolley’s citing of firms that are seeking to extend their regulatory authority beyond the scope of their purview is incredulous. Both the SEC and FINRA have vested interests in regulating these fixed insurance products. They do not regulate these products today, and therefore the state insurance division would be a far more credible resource on these products. They cannot be considered a reliable source on indexed annuities, as they have a plethora of inaccurate information on the products on their public websites and “alerts.”

Unfortunately, a few complex products have afforded this industry the perception of complexity over the past 15 years. However, the bulk of indexed annuities sold today are very simple to understand. In fact, 95.2% of indexed annuities offered today have crediting methods based on the simple formula of (A – B)/B. All indexed annuities limit potential indexed interest through the use of a pricing lever such as a participation rate, a cap, or a spread. Typically, only one of these levers is used to limit the potential indexed interest on the annuity. However, the bottom line is that the crediting method and pricing lever used are irrelevant. Indexed annuities are priced to return about 1% - 2% greater than other traditional fixed money instruments. So, if fixed annuities are earning 5% today, and indexed annuity consumer can expect to receive 6% - 7% interest over the life of their indexed annuity. Sure, some years they will receive zero, and other years they may receive double-digit gains. However, the end goal is to receive a rate that is competitive with other safe money places, not to compete with securities products.

Every single indexed annuity ever sold limits the consumer’s risk of loss as a result of the market downturn at ZERO. No indexed annuity consumer has ever received a negative adjustment to their annuity’s value as a result of a market decline. This is precisely why these products are so appealing. In addition, when the annuity receives zero crediting, the market’s low point (the end measurement for the crediting method) is now the beginning date for the next index measurement on these products. This provides a tremendous opportunity for indexed gains when the market rebounds.

As a the foremost expert and consultant in this market, I can tell you that I have never heard of David Babbel. I can neither confirm nor deny the validity of his study, as neither myself nor my clients use him as a resource on these products. The bottom line is that indexed annuities are a great solution for millions of Americans that cannot stomach putting their retirement dollars at risk in the market. On the other hand, these same consumers can look forward to the opportunity for greater interest crediting than what they could earn at their local bank.

I was astounded to see Mr. Woolley’s statement that “getting stuck in these contracts if you need the money early” is a big problem. In reality, every indexed annuity sold today allows consumers annual penalty-free access to their account value, should the need arise. This amount is typically 10% of the annuity’s value annually, but it can be as high as 20%. In addition, 9 out of 10 fixed annuities provide penalty-free access to the account value in the event of certain triggers such as nursing home confinement, terminal illness, disability and even death. Quite contrary to this article’s statements, indexed annuities are some of the most liquid retirement vehicles available today.

Even more damaging was Scott Wooley’s statement that “many insurers rescind gains you may be owed if you get out early.” Exactly ONE of the 275 indexed annuities sold today works in this manner. In addition, sales of this product accounted for less than 2% of total industry sales as of the first quarter of 2009.

While it is true that all annuities are intended to be a long-term commitment, Mr. Woolley seems to miss the big picture. What makes indexed annuities the most important part of millions of American’s retirement plans is that indexed annuity consumers are more risk averse than individuals investing in securities products such as stocks, bonds, and mutual funds. Indexed annuities are a “safe money place,” intended to be compared against other safe money places (i.e. fixed annuities and certificates of deposit). Any insurance agent or advisor selling these products knows the difference. Why doesn’t Mr. Woolley, who purports himself as an expert on these products?

In closing, it would be so greatly appreciated if you would provide a correction to your readers on this blatantly false article. There are millions of Americans relying on the accuracy of your information, and clarifying Mr. Woolley’s article is a good way to attempt to repair the damage of his statements.

Please feel free to let me know if I can serve as a resource to you or your editorial staff in the future.

Thank you.

Sheryl J. Moore

President and CEO

LifeSpecs.com

AnnuitySpecs.com

Advantage Group Associates, Inc.

(515) 262-2623

Indexed Annuity

2009-06-08T13:16:00.001-07:00

Forbes.com - Magazine Article

Forbes.com

Personal Finance
Equity-Indexed Annuities: A Costly Way To Limit Your Losses
Scott Woolley, 06.05.09, 5:35 PM ET

Their unsexy name aside, there's something undeniably seductive about equity-indexed annuities (EIA). Sold by insurance companies, these combination investment and insurance products promise investors a piece of any stock market gains while limiting downside when the market tanks. At the end of the investment, or accumulation, period, the annuity's owner is typically offered either a lump-sum distribution of the proceeds or regular payments based on the ending balance.

Over the past 15 years, the products have become increasingly popular and are offered by major insurers like Massachusetts Mutual Life Insurance Co., Prudential Financial, MetLife and Genworth Financial. While the investment features have looked increasingly alluring, the catch is that the stock market's wild seesawing could hardly have been better designed to enrich holders of equity-indexed annuities. Since 1995, these annuities have easily outpaced the S&P 500 and bond indexes alike.

"There is no asset category that outperformed them. We were extremely surprised, really just amazed," says David Babbel, professor emeritus of insurance and risk management, who conducted a study of equity-index annuity returns beginning in 1995.

Still, there are plenty of reasons to take a hard look at equity-indexed annuities before adding them to you portfolio. While rules differ, the basic idea is simple enough. The insurers who sell the annuities use derivatives to put collars around the annuities, which limit both their upside and downside for investors.

Tricky questions for buyers: Are those offsetting hedges being passed along at a fair price? And are other fees so high as to make the product a lousy buy?

The answer is "no" frequently enough that the investor alerts are posted by both the Securities and Exchange Commission and the Financial Industry Regulatory Authority. The products "are anything but easy to understand. One of the most confusing features of an EIA is the method used to calculate the gain in the index to which the annuity is linked," FINRA warns.

Typically, equity-linked annuities come with "participation rates" that limit the amount of market gains in which annuity holders share. If a contract has a 70% participation rate and the S&P climbs 10%, the annuity holder gets a 7% bump, for example. In exchange, the investor receives a loss limit, which often guarantees that he will do no worse than break even each calendar year. For 2008, when the market fell 38%, annuity investors' relative returns look brilliant.

Babbel, who has consulted for the insurance industry, is quick to point out that the period he studied was a highly unusual one, marked by quick, sharp drops in the market. Those are precisely the kind of collapses that equity-indexed annuities are good at sidestepping.

Even if you assume that the market will perform during the next 15 years like it did during the past 15, there's no guarantee that the counterparties selling the hedges won't jack up their fees and lower the performance of the equity indexed annuities.

Then there are the fees investors are likely to pay for the privilege of owning an equity-linked annuity. Like other deferred annuities, equity-index features regularly have fat expenses built in, often in ways that make it hard, if not impossible, to understand what you're really paying.

Another big problem: getting stuck in these contracts if you need the money early. Many come with sizable surrender fees that remain in force for several years. What's more, many insurers rescind gains you may be owed if you get out early.

As the old investing saw goes: Past performance is no guarantee of future results. If you have a long-term horizon and want to limit your potential losses, there are probably better ways to do it than equity-indexed annuities. Consider owing a mix of diversified, low-cost bond index funds to smooth out the bumps next time your equity holdings take a hit.

Also see: www.forbes.com/forbes/2008/1208/151.html

Florida Annuity-Sales fraud bill advances

2009-04-13T07:06:00.001-07:00

Florida annuity-sales fraud bill advances - Investment News
Florida annuity-sales fraud bill advances
By Darla Mercado
April 2, 2009, 9:11 AM EST
Post a Comment
Recommend (5)

A Florida Senate bill that would levy heavy penalties on agents and financial advisers who make fraudulent annuity sales has moved closer to becoming law — though not without a few insurance industry-friendly changes.

The Safeguard our Seniors Act, or SB 1372, on Monday moved to Florida’s Policy and Steering Committee on Ways and Means, placing it a step away from a full Senate vote.

Under the bill’s original provisions, which would apply to consumers over age 65, surrender periods — the length of time the investor must hold the annuity — would have been cut to five years.

It also set the maximum surrender fees, which investors must pay for exiting the product too soon, at 5% and reduced the fee 0% by the end of the fifth policy year.

Additionally, the original bill also extended the free-look period to 60 days from the normal 14-day limit.

In its new form, however, legislators have loosened the restrictions on the annuity sales, allowing for surrender charges to go as high as 10%, with the charge to fall by one percentage point each year, so that there is no surrender fee at the end of the 10th policy year.

Under the revised bill, the surrender fee changes don’t apply to accredited investors, defined as individuals with a net worth of greater than $1 million or with an annual income of more than $200,000 in each of the past two years, or $300,000 a year in joint income.

The amended bill also cuts the free-look period to 30 days.

The original bill also made “twisting” and “churning” annuities a third-degree felony punishable by up to five years in prison. The penalty has been expanded so as to cover fraudulent conduct in connection with the sales of all financial products.

The American Council of Life Insurers in Washington, the Florida chapter of the Falls Church, Va.-based National Association of Insurance and Financial Advisors and the National Association for Fixed Annuities of Milwaukee had combined efforts to fight the early version of the bill. NAIFA-Florida had also asked state finance chief Alex Sink to consider a maximum 10-year surrender period and 10% surrender charge limit.

Still, despite the adjustments, some carriers remain displeased.

For instance, American Equity Investment Life Insurance Co. of West Des Moines, Iowa, sent its sales force an e-mail, encouraging them to reach out to their legislators and let them know how the bill would affect their businesses.

“Now, more than ever, it is important that consumers have access to annuity products that protect their principal,” president Ron Grensteiner and Nick Gerhart, vice president of compliance communications, wrote in the e-mail.

“We do not believe in limiting product design and consumer choice,” theywrote. “Let your state representative know that by limiting the surrender charge to 10 years, they will limit product design.”

Index Annuities - The SEC's Annuity Grab

2009-04-10T12:55:00.001-07:00

Mary Schapiro's Securities and Exchange Commission Seeks to Extend Control Over Fixed Indexed Annuities - WSJ.com

An eternal Washington truth is that the more a federal agency gets beat up for regulatory failures, the more of the world it attempts to regulate. Witness the Securities and Exchange Commission, which has responded to recent criticism with a dubious power grab over another industry.

This particular overreach is aimed at fixed indexed annuities, a niche in the wider annuity market. Like traditional annuities, purchasers of the fixed index variety are guaranteed the return of their principal and a certain level of interest. The twist is that they also earn interest based on the upside performance of stock or bond indexes, say, the S&P 500. If the market goes up, investors get more. If it goes down, investors still get their principal and minimum interest.

Whatever their merits, these annuities have always been treated as insurance products, subject to myriad state rules that govern their marketing and sale, and the capital requirements of insurers. While the 1933 securities act gave the SEC the power to regulate securities, it exempted annuities.

Until last year, that is, when then SEC chief Christopher Cox announced his agency would regulate fixed indexed annuities. At the time, he claimed there were widespread sales abuses and that he was stepping up to protect senior citizens. Mr. Cox argued these annuities were "securities" that could be regulated by the SEC because they were tied to indexes and thus involved "risk."

This didn't go down well with state insurance commissioners, who explained their oversight and dared the agency to prove its sales abuse claims. The SEC couldn't do so, and by rule-writing time it was admitting that "the presence or absence of sales practice abuses is irrelevant." All that mattered was the risk: Specifically, the SEC claimed the risk to the annuity purchaser was that the market would rise, and that he'd get more than his minimum guarantee. In the age of Bernie Madoff, the SEC is thus putting itself on high alert to protect people whose only risk is making more money than they expect.

A coalition of insurers filed suit to block the proposed SEC rule in D.C. Circuit Court last month and has been granted expedited review. The National Association of Insurance Commissioners joined the legal fun this week. The suits note that a federal court has specifically ruled that these products are annuities, not securities. They also point out that the SEC has been negligent in considering the burden of its new rule, which by the agency's own admission will cost insurers $100 million in the first-year alone. In his blunt dissent to the rule, SEC Commissioner Troy Paredes noted the SEC was "entering into a realm that Congress prohibited us from entering" and would hurt small businesses and consumers.

This kind of regulatory wanderlust is all too typical of the modern SEC, which was once known as a cautious regulator but now looks for ever more financial land to grab. Never mind that the Madoff debacle, which followed the mutual fund late-trading fiasco, shows that the SEC can't properly supervise its current turf. There's a case to be made for national insurance regulation, including annuities, but the place to make that case is Congress. New SEC Chairman Mary Schapiro won't help investors or the reputation of her agency by continuing this legally suspect lunge for more power.

What Are The Benefits Of An Annuity?

2009-01-02T07:16:00.001-08:00

Benefits of an Annuity

Annuities are an excellent tool to help you plan
for your financial security. Fixed annuities offer a variety of benefits including
tax-deferred growth, ability to avoid probate, and lifetime income.

Tax-Deferred Growth

Tax-deferred annuity growth allows your money to grow faster because
you earn interest on dollars that would otherwise be paid as taxes. Your
principal earns interest, the interest compounds within the contract, and the
money you would have paid in taxes earns interest.

May Avoid Probate

Annuities offer the ability to name a beneficiary, which may
minimize the expense, delays, and publicity that comes with probate. Your named
beneficiary may receive death proceeds as either a lump sum or monthly income.

Lifetime Income

An immediate annuity can provide you with a guaranteed income
stream with the purchase of a tax-deferred annuity. You have the ability to
choose from several different income options, including life or a specific
period. With non-qualified plans, a portion of each income payment represents a
return of premium that is not taxable, reducing your tax
liabilities.

At McLeod Agency we understand that, depending on your
individual situation, you need the ability to choose whatever type of annuity
fits you best. With McLeod Agency, you have the ability to choose:

Traditional Fixed Annuity – Offers a
declared fixed interest rate that is guaranteed for a specific period and
guaranteed to never go below a specific percentage.

Index Annuity – Interest rate credited to
your annuity contract is linked to specific market indices that you can choose
on an annual basis. Once the interest is credited you are guaranteed that it can
never go down based on future market fluctuations.

Immediate Annuity – You are guaranteed an
income stream ranging from a specific period of time to your entire life. An
immediate annuity offers a solution to the problem of outliving your money.

What are the advantages and disadvantages of an Equity-Indexed Annuity?

2008-12-31T07:09:00.001-08:00

What are the advantages and disadvantages of an Equity-Indexed Annuity?
The major advantage of an equity-indexed annuity over other types of deferred annuity products is potentially higher interest rates available from links to equity indexes, which historically have provided significantly higher yields than fixed interest rate products. The major advantage, of course, may be the major disadvantage also, particularly in periods of index volatility. However, all equity-indexed annuities have an underlying minimum interest rate guarantee which guarantees you will never lose your premium due to index fluctuations or volatility. Thus the equity-indexed annuity provides the best of both worlds-linkage to equity indexes with no risk due to index volatility and safety of premium.

Annuity Guide

Fixed Annuity

What are the advantages and disadvantages of a Variable Annuity?

2008-12-30T08:57:00.001-08:00

What are the advantages and disadvantages of a Variable Annuity?

The advantage of a Variable Annuity is the ability to place your annuity
premium into equity investments such as stocks, bonds or mutual funds
and participate in the potentially higher increases available
historically in the equity or bond markets.
Increases in your Variable
Annuity are tax deferred until they are actually withdrawn from the
contract or annuitized. All increases in a Variable Annuity are taxed
as ordinary income the year the money is withdrawn.
The major
disadvantage of a Variable Annuity is that your assets, including your
premium, are subject to market risk, i.e. loss in value based upon poor
performance of the markets. As with a fixed deferred annuity, your
purchase of a Variable Annuity should be viewed as a means to fund your
long-term retirement goals.
Historically, products in the equity
markets have resulted in higher increases than fixed rate products. Of
course, many factors are important in determining whether a Variable
Annuity is right for you, including your age, retirement goals and
aversion to risk. If you are young and looking to preserve significant
funds for your long-term retirement needs, a Variable Annuity is an
excellent way to do so.
If you are older and closer to retirement, or
simply desire to preserve your accumulated assets by purchasing a
secure vehicle, a fixed deferred annuity may be the best choice.

Annuity Surrender Charges and How To Avoid Them.

2008-12-27T08:00:00.001-08:00

Is there any way to avoid the annuity surrender or early withdrawal charges?

Yes.
With most fixed deferred annuities, surrender or withdrawal charges are
waived if you (1) die;
(2) become confined to a hospital or nursing
home for a specified period; or
(3) you choose to take a guaranteed
income stream. In addition, most fixed deferred annuities allow you
take up to 10% of your annuity contract value each year without incurring a
surrender or withdrawal charge.
See tax consequences of early
annuity withdrawals. Annuity rollover.

There
are no penalties on distributions if:
(1) You are older than age 59 ½ (2) Distributions are made on or after
the death of the owner of the annuity (3) Become disabled
(4) Distributions are made as a series of substantially equal periodic
payments (not less than annually) for your life or your life expectancy
or joint life expectancies of you and your designated beneficiary
(5) Distributions are made under a single premium immediate annuity
with a starting date no later than one year from the date you purchase
the annuity.
(6) If the distributions are made under certain annuities issued as a
part of a structured settlement agreement.
There are additional exceptions in the case of IRAs. Please contact
your tax advisor for more details.

401k Annuity

Annuity Rate

Advantages and Disadvantages of a Fixed Annuity?

2008-12-26T08:24:00.001-08:00

What are the advantages and disadvantages of a Fixed Deferred Annuity?

The
major advantages of a fixed deferred annuity are guarantee of premium
and tax deferral. Generally, fixed deferred annuities appeal to the
risk averse who are looking to preserve funds for retirement with
guarantee of premium, competitive fixed rate interest guarantees and no
risk to premium. The major disadvantage of a fixed rate deferred
annuity is that fixed rate guarantee-type products have provided lower
growth than those available historically in the equity markets. Of
course, many factors are important in determining whether a fixed rate
deferred annuity is right for you, including your age, retirement goals
and aversion to risk. If you are older and closer to retirement, or
simply desire to preserve your assets in a secure vehicle, a fixed
deferred annuity may be the best choice. If you are younger and looking
to preserve significant funds for your long-term financial needs and
are willing to take greater risk, an Equity-Indexed or Variable Annuity
might be a better alternative at the present time.

What is a Fixed Deferred Annuity?

2008-12-23T12:33:00.001-08:00

A Fixed Deferred Annuity is a contract between you and the insurance company which pays a guaranteed current interest rate.
The interest rate may be guaranteed for one or more years and earns compound interest. The interest earnings compound on a tax-deferred basis.
Fixed deferred annuities are offered either on a single premium basis, i.e. you give the insurance company a lump sum premium payment, (typically $5,000 or more) or on a flexible premium basis, i.e. you pay a lower re-occurring premium payment on a monthly, quarterly, or annual basis. In addition to tax deferral, fixed deferred annuities offer safety of your premium.
Fixed deferred annuities offer a current interest rate which may never be less than a lifetime minimum guaranteed interest rate (typically 3%).
The current interest rate is declared and guaranteed by the insurance company. Thus your premium in a fixed deferred annuity is not subject to market risk associated with volatile financial markets.
Fixed deferred annuities have penalties for early withdrawal called surrender charges or withdrawal charges. These charges typically decline over the length of the surrender charge period.

Opening Remarks and Dissent Regarding Final Rule 151AIndexed Annuities and Certain Other Insurance Contracts

2008-12-18T09:05:00.001-08:00

SEC Speech: Opening Remarks and Dissent Regarding Final Rule 151A: Indexed Annuities and Certain Other Insurance Contracts;(Troy A. Paredes) Washington, D.C.: December 17, 2008

Speech by SEC Commissioner:
Opening Remarks and Dissent Regarding Final Rule 151A
Indexed Annuities and Certain Other Insurance Contracts
by
Commissioner Troy A. Paredes
U.S. Securities and Exchange Commission
Open Meeting of the Securities & Exchange Commission
Washington, D.C.
December 17, 2008

Thank you, Chairman Cox.

I believe that proposed Rule 151A addressing indexed annuities is rooted in good intentions. For instance, at the time the rule was proposed, the Commission watched a television clip from Dateline NBC that described individuals who may have been misled by seemingly unscrupulous sales practices into buying these products. Part of our tripartite mission at the SEC is to protect investors, so there is a natural tendency to want to act when we hear stories like this.

However, our jurisdiction is limited; and thus our authority to act is circumscribed. Rule 151A is about this very question: the proper scope of our statutory authority.

In our effort to protect investors, we cannot extend our reach past the statutory stopping point. Section 3(a)(8) of the Securities Act of 1933 ('33 Act) provides a list of securities that are exempt from the '33 Act and thus, by design of the statute, fall beyond the Commission's reach. The Section 3(a)(8) exemption includes, in relevant part, "[a]ny insurance or endowment policy or annuity contract or optional annuity contract, issued by a corporation subject to the supervision of the insurance commissioner . . . of any State or Territory of the United States or the District of Columbia." I am not persuaded that Rule 151A represents merely an attempt to provide clarification to the scope of exempted securities falling within Section 3(a)(8). Instead, by defining indexed annuities in the manner done in Rule 151A, I believe the SEC will be entering into a realm that Congress prohibited us from entering. Therefore, I cannot vote in favor of the rule and respectfully dissent.

Rule 151A takes some annuity products (indexed annuities), which otherwise may be covered by the statutory exemption in Section 3(a)(8), and removes them from the exemption, thus placing them within the Commission's jurisdiction to regulate. If the Commission's Rule 151A analysis is wrong — which is to say that indexed annuities do fall within Section 3(a)(8) — then the SEC has exceeded its authority by seeking to regulate them. In other words, the effect of Rule 151A would be to confer additional authority upon the SEC when these products, in fact, are entitled to the Section 3(a)(8) exemption.

The Supreme Court has twice construed the scope of Section 3(a)(8) for annuity contracts in the VALIC and United Benefit cases.1 I believe the approach embraced by Rule 151A conflicts with these Supreme Court cases. Although neither VALIC nor United Benefit deals with indexed annuities directly, the cases nevertheless are instructive in evaluating whether such a product falls within the Section 3(a)(8) exemption. And despite the adopting release's efforts to discount its holding, at least one federal court applying VALIC and United Benefit has held that an indexed annuity falls within the statutory exemption of Section 3(a)(8).2

When fixing the contours of Section 3(a)(8), the relevant features of the product at hand should be considered to determine whether the product falls outside the Section 3(a)(8) exemption. Rule 151A places singular focus on investment risk without adequately considering another key factor — namely, the manner in which an indexed annuity is marketed.

Moreover, I believe that Rule 151A misconceptualizes investment risk for purposes of Section 3(a)(8). The extent to which the purchaser of an indexed annuity bears investment risk is a key determinant of whether such a product is subject to the Commission's jurisdiction. Rule 151A denies an indexed annuity the Section 3(a)(8) exemption when it is "more likely than not" that, because of the performance of the linked securities index, amounts payable to the purchaser of the annuity contract will exceed the amounts the insurer guarantees the purchaser. This approach to investment risk gives short shrift to the guarantees that are a hallmark of indexed annuities. In other words, the central insurance component of the product eludes the Rule 151A test. More to the point, Rule 151A in effect treats the possibility of upside, beyond the guarantee of principal and the guaranteed minimum rate of return the purchaser enjoys, as investment risk under Section 3(a)(8). I believe that it is more appropriate to emphasize the extent of downside risk — that is, the extent to which an investor is subject to a risk of loss — in determining the scope of Section 3(a)(8). When investment risk is properly conceived of in terms of the risk of loss, it becomes apparent why indexed annuities may fall within Section 3(a)(8) and thus beyond this agency's reach, contrary to Rule 151A.

Not only does Rule 151A seem to deviate from the approach taken by courts, including the Supreme Court, but it also appears to depart from prior positions taken by the Commission. For example, in an amicus brief filed with the Supreme Court in the Otto case,3 the Commission asserted that the Section 3(a)(8) exemption applies when an insurance company, regulated by the state, assumes a "sufficient" share of investment risk and there is a corresponding decrease in the risk to the purchaser, such as where the purchaser benefits from certain guarantees. Yet Rule 151A denies the Section 3(a)(8) exemption to an indexed annuity issued by a state-regulated insurance company that bears substantial risk under the annuity contract by guaranteeing principal and a minimum return.

In addition, Rule 151A seems to diverge from the analysis embedded in Rule 151. Rule 151 establishes a true safe harbor under Section 3(a)(8) and provides that a variety of factors should be considered, such as marketing techniques and the availability of guarantees. The Rule 151 adopting release even indicates that the rule allows for certain "indexed excess interest features" without the product falling outside the safe harbor.

An even more critical difference between Rule 151 and Rule 151A is the effect of failing to meet the requirements under the rule. If a product does not meet the requirements of Rule 151, there is no safe harbor, but the product nevertheless may fall within Section 3(a)(8) and thus be an exempted security. But if a product does not pass muster under the Rule 151A "more likely than not" test, then the product is deemed to fall outside Section 3(a)(8) and thus is under the SEC's jurisdiction. In essence, while Rule 151 provides a safe harbor, Rule 151A takes away the Section 3(a)(8) statutory exemption.

I am not aware of another instance in the federal securities laws where a "more likely than not" test is employed, and for good reason. A "more likely than not" test does not provide insurers with proper notice of whether their products fall within the federal securities laws or not. If an insurer applies the test in good faith and gets it wrong, the insurer nonetheless risks being subject to liability under Section 5 of the Securities Act, even if the insurer had no intent to run afoul of the federal securities laws. In addition, under the "more likely than not" test, the availability of the Section 3(a)(8) exemption turns on the insurer's own analysis. Accordingly, it is at least conceivable that the same product could receive different Section 3(a)(8) treatment depending on how each respective insurer modeled the likely returns.

Further, I am concerned that Rule 151A, as applied, reveals that the "more likely than not" test, despite its purported balance, leads to only one result: the denial of the Section 3(a)(8) exemption. In practice, Rule 151A appears to result in blanket SEC regulation of the entire indexed annuity market. The adopting release indicates that over 300 indexed annuity contracts were offered in 2007 and explains that the Office of Economic Analysis has determined that indexed annuity contracts with typical features would not meet the Rule 151A test. Indeed, the adopting release elsewhere expresses the expectation that almost all indexed annuity contracts will fail the test. If everyone is destined to fail, what is the purpose of a test? Further, there is at least some risk that in sweeping up the index annuity market, the rule may sweep up other insurance products that otherwise should fall within Section 3(a)(8).

The rule has other shortcomings, aside from the legal analysis that underpins it. These include, but are not limited to, the following.

First, a range of state insurance laws govern indexed annuities. I am disappointed that the rule and adopting release make an implicit judgment that state insurance regulators are inadequate to regulate these products. Such a judgment is beyond our mandate or our expertise. In any event, Section 3(a)(8) does not call upon the Commission to determine whether state insurance regulators are up to the task; rather, the section exempts annuity contracts subject to state insurance regulation.

Second, as a result of Rule 151A, insurers will have to bear various costs and burdens, which, importantly, could disproportionately impact small businesses. Some even have predicted that companies may be forced out of business if Rule 151A is adopted. Such an outcome causes me concern, especially during these difficult economic times. Even when the economy is not strained, such an outcome is disconcerting because it can lead to less competition, ultimately to the detriment of consumers.

Third, the Commission received several thousand comment letters since Rule 151A was proposed in June 2008. Consistent with comments we have received, I believe that there are more effective and appropriate ways to address the concerns underlying this rulemaking. One possible alternative to Rule 151A would be amending Rule 151 to establish a more precise safe harbor in light of all the relevant facts and circumstances attendant to indexed annuities and how they are marketed. A more precise safe harbor would provide better clarity and certainty in this area — regulatory goals the Commission has identified — and would preserve the ability of insurers to find an exemption outside the safe harbor by relying directly on Section 3(a)(8) and the cases interpreting it. I believe further exploration of alternative approaches is warranted, as is continued engagement with interested parties, including state regulators.

In closing, I request that my remarks be included in the Federal Register with the final version of the release. My remarks today do not give a full exposition of the rule's shortcomings, but rather highlight some of the key points that lead me to dissent. I wish to note that these dissenting remarks just given represent my view after giving careful consideration to the range of arguments presented by the Commission's staff, particularly the Office of General Counsel, the commenters, and my own counsel, as well as those of my fellow Commissioners. Although I cannot support the rule, I nonetheless thank the staff for the hard work they have devoted to its preparation.

Endnotes

1See generally SEC v. Variable Annuity Life Ins. Co. of Am., 359 U.S. 65 (1959); SEC v. United Benefit Life Ins. Co., 387 U.S. 202 (1967).

2See Malone v. Addison Ins. Mktg., Inc., 225 F. Supp. 2d 743 (W.D. Ky. 2002).

3Otto v. Variable Annuity Life Ins. Co., 814 F.2d 1127 (7th Cir. 1987). The Supreme Court denied the petition for a writ of certiorari.

http://www.sec.gov/news/speech/2008/spch121708tap.htm
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Modified: 12/17/2008

Index Annuity Regulated As A Security - Rule 151a Adopted by the SEC

2008-12-17T10:41:00.001-08:00

12-17-08

The Securities And Exchange Commission approved Rule 151a by vote of four to one.

Traditional fixed annuities will not be regulated as securities.

There was no noticeable index annuity industry representative opposing the
,SEC’s proposed rule 151A which now turn fixed indexed annuities
(FIAs) into securities products.

www.annuitydefinition.com

Traditional Fixed Interest Rate Annuities

2008-12-13T08:04:00.001-08:00

American Equity - Products for Today - Fixed Rate Annuities
Traditional Fixed Interest Rate Annuities
A traditional fixed annuity is a contract between you and American Equity. Your annuity earns a competitive interest rate, which is declared by the board of directors at American Equity and is guaranteed for a specified period of time. It also contains a guaranteed minimum interest over the term of the contract. Taxes are not due on earnings until withdrawn.

The benefits and features of American Equity�s traditional fixed annuities include:

* Tax-Deferred Growth.
* Competitive current and renewal interest rates.
* First year additional interest rate bonuses or Multi-Year Guaranteed Interest Rates.
* Single or Flexible Premium.
* No up front sales charges or fees.
* Systematic Withdrawals of interest or amounts to satisfy IRS minimum distributions available immediately.**
* 10% penalty-free withdrawals starting in year 2.
* Additional liquidity if you are confined to a nursing home or diagnosed with a terminal illness (available by state approval).
* Company Surrender Charges may apply for early withdrawal.
* Surrender Charges are waived at death.

** Benefit not guaranteed and subject to change.

Features and benefits may vary by contract form and state. Please review the contract or product disclosure for more information.

Annuities are products of the insurance industry and are not guaranteed by any bank or insured by the FDIC.

Fixed Index Annuity - What Is Triple Compounding?

2008-12-13T07:36:00.001-08:00

American Equity - Tax Deferral
Triple Compounding Solutions!

One of the primary advantages of deferred annuities is the opportunity to accumulate a substantial sum of money by allowing your premium and interest to grow tax-deferred. Interest earned on your American Equity annuity is not currently taxable by the federal or state government until you choose to make a withdrawal. This is the key difference between an annuity and other taxable financial vehicles. A 5% return may sound good initially, but if you are in a taxable vehicle with a combined 27% tax bracket, the actual return is 3.65%. Combine this with an average inflation rate of 4%, and what have you truly gained? That�s right... nothing!

Taxable vs. Tax-Deferred

With that in mind, consider the many advantages of an annuity, including triple compounding! With annuities you earn interest on your principal, interest on your interest, and interest on what you would normally pay in taxes. You will not pay income taxes on annuity interest until you withdraw it from your annuity. You control when you pay income taxes!

Deferred Annuity

SEC Ignores Congressional, State, and Industry Opposition to Indexed Annuity Proposal

2008-12-12T09:14:00.001-08:00

SEC Ignores Congressional, State, and Industry Opposition to Indexed Annuity Proposal
SEC Ignores Congressional, State, and Industry Opposition to Indexed Annuity Proposal

Last update: 11:09 a.m. EST Dec. 12, 2008
WASHINGTON, Dec 12, 2008 /PRNewswire via COMTEX/ -- The Coalition for Indexed Products issued a statement expressing "deep disappointment" in the Security and Exchange Commission's decision to pursue Proposed Rule 151A, which would require all indexed annuities to be registered as securities. The SEC announced yesterday that the proposal would be an agenda item on the Commission's December 17 meeting.
A letter signed by 19 members of Congress -- including several on the House Financial Services Committee -- was recently sent to SEC Commissioners expressing opposition to the proposed rule, according to the Coalition. It noted that Proposed Rule 151A would "reduce product availability and consumer choice" and "effectively [place] the cost of the regulation squarely on the shoulders of consumers."
Other high profile opponents include the National Association of Insurance Commissioners, the National Conference of Insurance Legislators, and a number of Congressional members who wrote separate letters to the SEC.
"The SEC's action appears to ignore the thousands of comments filed against this misguided proposal," said Jim Poolman, spokesperson for the Coalition and former North Dakota Insurance Commissioner.
"It is concerning that the SEC continues to see this issue as a priority in the middle of arguably the most severe financial crisis since World War II," Mr. Poolman added. "The Commission seems content to eliminate millions in market capital from the insurance industry, based on highly questionable suppositions."
SOURCE The Coalition for Indexed Products

Annuity
Annuity Rate
Annuity Guide
Index Annuities
Deferred Annuity

Fixed Indexed Universal Life Insurance

2008-12-12T07:10:00.003-08:00

Sagicor Life Introduces New Fixed Indexed Universal Life Product - 12/10/2008 - insurancenewsnet.com
Tampa, FL - December 9, 2008 – Sagicor Life Insurance Company is pleased to introduce its Platinum Series Fixed Indexed Universal Life product Which is now available in the following states: AL, AR, CO, DC, DE, GA, FL, HI, ID, IN, KS, MD, MO, NC, NE, NV, OK, RI, SC, and WA. More state approvals are soon.

The Platinum Series Fixed Indexed Universal Life product is ideal for family income protection, college savings, wealth building, retirement savings, estate planning, wealth transfer, charitable giving, business continuation, buy/sell plans, executive bonus plans, deferred compensation plans and more. The Fixed Indexed Universal Life is part of a growing portfolio of life and annuity products offered by Sagicor Life.

A key highlight of the Fixed Indexed Universal Life product is it provides immediate death benefit protection along with three distinct crediting strategies offering the potential for significant cash value growth on a taxed-deferred basis with no market risk. The available crediting strategies include a one-year Declared Rate Strategy, a one-year point-to-point strategy linked to the S&P 500® Index and a three-year point-to-point strategy based on a basket of indices made up of the Russell® 2000, the Dow Jones EURO STOXX 50® Index and the Hang Seng Index.

Other features include the Accelerated Benefit Insurance Rider which includes Terminal Illness and Chronic Illness Living Benefits*, penalty-free withdrawals, policy loans after the first year** and preferred loans available after the policy has been in force for ten years. Available optional riders include the Primary Insured Term Rider, Waiver of Monthly Deductions Rider, Additional Insured Term Rider, Children’s Term Rider, and Accidental Death Benefit Rider. Policy and Riders are not available in all states and state variations apply. For more information visit www.SagicorLifeUSA.com or contact our Sales Department at salesdept@sagicorlifeusa.com or call 800-406-9900.

About Sagicor Life Insurance Company

Sagicor Life Insurance Company is a full-service life insurance company offering a wide range of competitive products consisting of term, whole life, indexed life and annuities. Licensed in 44 states and the District of Columbia, Sagicor Life is a wholly-owned subsidiary of Sagicor Financial Corporation, one of the oldest insurance groups in the Americas, with operations in 22 countries including the United States, United Kingdom, Latin America and the Caribbean. Sagicor Life is committed to offering our agents and customers world-class service with integrity and value.

* Not available in all states.
** In Indiana, loans can be taken in the first year.

MEDIA CONTACT:

Anabel S. Thomas
Sagicor Life Insurance Company
Phone: (813) 287-1602 ext. 6207
Fax: (813) 287-7420
anabel_thomas@sagicor.com

Index Annuity
Equity Index
Index Annuity Rate

Fixed Indexed Universal Life Insurance

2008-12-12T07:10:00.001-08:00

Sagicor Life Introduces New Fixed Indexed Universal Life Product - 12/10/2008 - insurancenewsnet.com
Tampa, FL - December 9, 2008 – Sagicor Life Insurance Company is pleased to introduce its Platinum Series Fixed Indexed Universal Life product Which is now available in the following states: AL, AR, CO, DC, DE, GA, FL, HI, ID, IN, KS, MD, MO, NC, NE, NV, OK, RI, SC, and WA. More state approvals are soon.

The Platinum Series Fixed Indexed Universal Life product is ideal for family income protection, college savings, wealth building, retirement savings, estate planning, wealth transfer, charitable giving, business continuation, buy/sell plans, executive bonus plans, deferred compensation plans and more. The Fixed Indexed Universal Life is part of a growing portfolio of life and annuity products offered by Sagicor Life.

A key highlight of the Fixed Indexed Universal Life product is it provides immediate death benefit protection along with three distinct crediting strategies offering the potential for significant cash value growth on a taxed-deferred basis with no market risk. The available crediting strategies include a one-year Declared Rate Strategy, a one-year point-to-point strategy linked to the S&P 500® Index and a three-year point-to-point strategy based on a basket of indices made up of the Russell® 2000, the Dow Jones EURO STOXX 50® Index and the Hang Seng Index.

Other features include the Accelerated Benefit Insurance Rider which includes Terminal Illness and Chronic Illness Living Benefits*, penalty-free withdrawals, policy loans after the first year** and preferred loans available after the policy has been in force for ten years. Available optional riders include the Primary Insured Term Rider, Waiver of Monthly Deductions Rider, Additional Insured Term Rider, Children’s Term Rider, and Accidental Death Benefit Rider. Policy and Riders are not available in all states and state variations apply. For more information visit www.SagicorLifeUSA.com or contact our Sales Department at salesdept@sagicorlifeusa.com or call 800-406-9900.

About Sagicor Life Insurance Company

Sagicor Life Insurance Company is a full-service life insurance company offering a wide range of competitive products consisting of term, whole life, indexed life and annuities. Licensed in 44 states and the District of Columbia, Sagicor Life is a wholly-owned subsidiary of Sagicor Financial Corporation, one of the oldest insurance groups in the Americas, with operations in 22 countries including the United States, United Kingdom, Latin America and the Caribbean. Sagicor Life is committed to offering our agents and customers world-class service with integrity and value.

* Not available in all states.
** In Indiana, loans can be taken in the first year.

MEDIA CONTACT:

Anabel S. Thomas
Sagicor Life Insurance Company
Phone: (813) 287-1602 ext. 6207
Fax: (813) 287-7420
anabel_thomas@sagicor.com

Index Annuity
Equity Index
Index Annuity Rate

Fixed Annuities can’t be seen as asset in determining nursing home assistance.

2008-12-08T13:48:00.001-08:00

Annuity ruling sets standard | Wilkes-Barre News | The Times Leader
Annuity ruling sets standard
Recent decision reaffirms other rulings that annuity can’t be seen as asset in determining nursing home assistance.

By Terrie Morgan-Besecker tmorgan@timesleader.com
Law & Order Reporter

In a precedent-setting ruling, a federal appellate court has said the state Department of Public Welfare cannot consider a $250,000 annuity a Wilkes-Barre woman purchased following her husband’s entry into a nursing home as an asset when determining whether he was eligible for Medicaid benefits.

The ruling by the Third Circuit Court of Appeals is the latest in a series of court cases brought by welfare officials in Pennsylvania and other states. The cases challenge a loophole in the Medicaid law that officials say has allowed affluent couples to use annuities to shelter assets that otherwise would be available to pay for an institutionalized spouse’s care.

The decision, issued last month in the case of Josephine James, is significant because it reaffirms prior court rulings, said James’s attorney, Matthew Parker of Williamsport. It will affect all residents in the states covered by the Third Circuit – New Jersey, Pennsylvania and Delaware.

But Jason Manne, chief deputy counsel for DPW, said the court’s ruling is fact-specific to the James case. Even though the department lost, Manne contends the legal reasoning the court employed will help DPW challenge the use of annuities in calculating Medicaid benefits.

The ruling is being closely monitored by attorneys on both sides of the issue as the stakes are huge. The average annual cost of nursing home care for one person is $60,000, according to DPW. Last year, Pennsylvania’s Medicaid fund paid out more than $3 billion to nursing homes.

While providing health care coverage to all persons is a laudable goal, DPW says, it has an obligation to ensure that Medicaid is utilized for those who truly need it.

“This does not involve poor people or people of modest means,” Manne said. “The problem is you have individuals who have hundreds and hundreds of thousands of dollars, sometimes even millions, who, rather than use their money for their nursing home care, want the taxpayers to pay for that care.”
A legal loophole

But Parker and other elder-law attorneys say couples such as the Jameses are simply availing themselves of all options to ensure the non-institutionalized spouse is left with sufficient income to support him or herself.

They note that amendments to the law that went into effect in 2006 now require DPW be listed as a lien holder on annuities in which a person or the person’s spouse is receiving Medicaid benefits. That does not affect Josephine James, whose case started in 2005. For all subsequent cases, it allows DPW to recoup all money spent on caring for the institutionalized spouse from the estate of the non-institutionalized spouse after their death.

They also note that regulations are in place to ensure the process is not abused. Welfare officials, they say, are trying to use the courts to circumvent a law they don’t like.

“If in fact there are any alleged loopholes, they were created by Congress. It is not for DPW ... to determine what public policy is when Congress has spoken,” said attorney Shirley Berger Whitenack of New Jersey, a member of the National Academy of Elder Law Attorneys. “If DPW doesn’t like it, they can certainly lobby Congress” to change the law.

The key issue focuses on the structure of an annuity – a contractual agreement in which the buyer gives the seller, typically an insurance company or bank, a lump sum of money. The company or bank then pays the purchaser a consistent monthly amount, or an “income stream,” over a given period of time.

In determining whether an institutionalized spouse will qualify for Medicaid assistance, states consider a married couple’s assets – including cash, stocks, bonds and property. The law prohibits the state from considering the income of the non-institutionalized spouse – known as the community spouse – in that calculation.

The community spouse is afforded a percentage of the assets to live on. Any excess is deemed an “available asset” that can be used to pay nursing home costs. Medicaid kicks in once that money has been exhausted.

The key benefit of an annuity is that it allows couples to convert joint assets that otherwise would be deemed available into an “income stream” for the community spouse. Because that money is now considered to be the income of the community spouse – not an asset – it cannot be counted when determining the institutionalized spouse’s Medicaid eligibility.
How it worked

In the James case, Robert James, now deceased, was admitted to a Wilkes-Barre nursing home on Aug. 10, 2005. At that time, he and his wife had total assets of $381,443, of which roughly $278,000 was deemed “available assets” that could be used to pay for Robert’s care.

In order to qualify Robert for Medicaid, Josephine James purchased a $250,000 annuity on Sept. 12, 2005 – about a month after her husband entered the home. She also spent about $28,000 on a new car, leaving no available assets to pay for her husband’s care under Medicaid rules.

Robert James then applied for Medicaid benefits, but was denied by DPW.

The department did not allege Josephine James did anything improper when she converted the couple’s assets into an annuity for herself or when she purchased the car, both of which are allowed under the rules.

Rather, it argued the annuity was an asset because Josephine James could, if she chose, sell the “income stream” it generated to a firm such as J.G. Wentworth, a company that purchases annuities and other types of structured payments for a lump sum.

The Jameses’ filed a federal court action that challenged the department’s interpretation. A federal judge ruled in their favor, saying nothing within the Medicaid Act says DPW can force a person to sell an annuity to a second party.

DPW appealed to the Third Circuit, which also sided with the Jameses.
More tests ahead

In its ruling, the court said Medicaid rules state that an asset can only be deemed “available” if the owner has the ability to liquidate it without incurring legal liability.

In the James case, her annuity was non-transferable and non-revocable, meaning she could not access the principal and could not sell it. If she did, she would be breaking the contract, subjecting her to legal liability. The court said it therefore could not be considered an asset.

While the ruling benefits James, Manne said it will not benefit persons who purchase annuities today because Pennsylvania in 2005 amended its law to forbid sellers of annuities from including a clause that makes them non-transferable. That would allow annuities to be sold without legal liability, he said, and allow the state to consider them an asset.

Manne acknowledged that others have interpreted the Third Circuit’s decision differently. There are also other complex legal issues that still must be resolved, he said.

Given that, the true significance of the ruling won’t be known until other courts apply the decision to pending cases that raise issues similar to the James case, he said.

Terrie Morgan-Besecker, a Times Leader staff writer, may be reached at 570-829-7179.

Variable Annuity - Insurers Abandon Rosy View of Variable Annuities

2008-12-02T09:07:00.001-08:00

Insurers Abandon Rosy View of Variable Annuities at SmartMoney.com
Insurers Abandon Rosy View of Variable Annuities

For the last few years, insurance companies have been luring investors with an irresistible product: an investment that guaranteed market gains, with no risk, and generous income payments for life. Surprise of surprises, that pitch has worked, reviving the lackluster variable annuity and attracting about $140 billion a year in investor assets.

But the guarantees on these variable annuities sounded too good to be true, and a few months ago SmartMoney asked insurance company executives to explain how, exactly, they planned to keep them.

As it turns out, it’s not so easy. A variable annuity is basically an investment portfolio with an insurance overlay – investors got tax-deferral and, usually, a death benefit, but paid high fees and big withdrawal penalties. But in the last few years, insurance companies have started marketing the investments as safe havens for people in retirement or close to it: a typical product lets investors stay in the market, but promises a lifetime income stream based on an account value that can only go up, often by as much as 7% per year. That means investors’ potential income rises regardless of what happens in the market.

How’s that possible? Apparently, it’s not. When we asked earlier this year, the insurance companies told us they had it all under control, guaranteeing the benefits with sophisticated models and elaborate hedging strategies that would hold up even in a severe market downturn. But now that we’ve had that severe downturn, several companies have stopped selling their most generous variable annuities or raised fees, citing “prudence in light of current market conditions” – code for “we didn’t expect this.”

MassMutual has stopped selling an annuity that guaranteed a 6% annual return; AXA-Equitable has taken a product with a 6.5% guarantee off the shelf and raised the prices on its existing product; other companies are doing the same. “In today’s market, a 6.5% guarantee just is not prudent,” said Steve Mabry, senior vice president of product development at AXA-Equitable.

In theory, investors who already own one of these annuities are still entitled to the benefits for as long as they hold their contracts. And lucky them: in today’s markets, a 6.5% annual return looks downright spectacular. The problem is, the guarantees are still only as good as the companies that insure them. And this most recent move – discontinuing products, raising fees – acknowledges that the companies’ models and hedging strategies aren’t as stable as they thought. The financial crisis has hurt insurance companies across the board -- AIG has already received federal bailout funds; the Hartford has taken steps to apply for them – and the question policyholders need to ask is, “Will my company be around in four or five years, when I want to exercise that benefit,” says John McCarthy, vice president at Advance Sales, an annuity research company.

There are backstops in place, of course, but if companies go out of business, it won’t look good for investors. “You may be able to collect your account value,” said McCarthy. “But you’ve paid for a guarantee that you’ll never get.” The insurance companies say that won’t happen. They point to the rules and regulations that require them to keep a certain amount of money in reserve. Also, most states require insurers to guarantee at least $100,000 in annuity benefits, but it’s not clear whether these variable annuity benefits qualify. “They might be covered today, and they might not be, and that might not mean anything five or 10 years from now,” says Mike Surguine, the executive director of the Arizona Life and Disability Guaranty Fund. “The laws could change.” And, says AXA’s Mabry, the company discontinued its most generous guarantee precisely to insure the financial health of the parent company.

But some companies are showing no sign of retreat, at least not yet. Prudential is still selling its most generous annuity, which guarantees a 7% annual rate of return under any market conditions. It’s not cheap – the all-in cost for an annuity with the guarantee is well over 3% per year – but in this market, it’s selling like crazy: In the third quarter of 2008, 75% of Prudential annuities carried the benefit. The company says it has no plans to raise its prices or reduce the benefit, and says it’s confident it can handle these commitments. In any case it’s a big guarantee – as long as they’re around to keep it.

Fixed Index Annuity - American Equity - News Article

2008-11-30T18:21:00.001-08:00

American Equity to Present at Friedman, Billings, Ramsey 2008 Fall Investor Conference
WEST DES MOINES, Iowa, Nov 25, 2008 (BUSINESS WIRE) -- American Equity Investment Life Holding Company (NYSE: AEL), today announced that Wendy Carlson, CFO and General Counsel, and John Matovina, Vice Chairman, will be presenting at the Friedman, Billings, Ramsey 2008 Fall Investor Conference in New York, NY on Tuesday, December 2 at 2:20 p.m. EST. Investors may access a web cast of this presentation on American Equity's Website, www.american-equity.com.

Certain statements made during this presentation may constitute forward-looking statements for purposes of the safe harbor provisions under The Private Securities and Reform Act of 1995. Actual results may differ materially. These forward-looking statements are subject to a number of risks and uncertainties discussed in detail in American Equity's most recent SEC filings.

ABOUT AMERICAN EQUITY

American Equity Investment Life Holding Company, through its wholly-owned operating subsidiaries, is a full-service underwriter of a broad line of annuity and insurance products with a primary emphasis on the sale of fixed-rate and index annuities. The company's headquarters are located at 5000 Westown Parkway, West Des Moines, Iowa, 50266. The mailing address of the company is: P.O. Box 71216, Des Moines, Iowa, 50325. For more information, visit our website www.american-equity.com.

SOURCE: American Equity Investment Life Holding Company

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Indexed Annuity - American Equity Announces AEL Management Succession

2008-11-22T08:13:00.001-08:00

American Equity - News Article
WEST DES MOINES, Iowa, Nov 21, 2008 (BUSINESS WIRE) -- American Equity Investment Life Holding Company (NYSE: AEL), today announced the implementation of a senior management succession plan as approved by its Board of Directors and David J. Noble, Chairman. Mr. Noble, who founded the company in 1995, has served as its Chairman, Chief Executive Officer, President and Treasurer from inception and led the Company through its dramatic growth over the last decade. Commented Mr. Noble: "I have built a senior management team who possess substantial industry experience as well as many years of working effectively together. The time has come to call upon them to assume full responsibility for the day-to-day management and operations of the Company. I am tremendously proud of American Equity and the people who helped me build it."

The management succession plan includes the following changes in the executive ranks of the company and of its primary operating subsidiary, American Equity Investment Life Insurance Company ("American Equity Life"), effective January 1, 2009:

AEL:

John M. Matovina, Vice Chairman, Chief Financial Officer and Treasurer

Wendy L. Carlson, Chief Executive Officer and President

American Equity Life:

Ron Grensteiner, President

Debra J. Richardson, Chief Administrative Officer, Executive Vice President and Secretary

Mr. Noble will remain as Chairman of the Board of AEL as well as American Equity Life. All other executive positions within the Company remain unchanged.

Kevin R. Wingert will resign as President of American Equity Life and as a Director of AEL and American Equity Life effective January 1, 2009, in order to form his own business as a national marketing organization. He intends to principally market American Equity Life products through a new agency force he will create. Commented Mr. Wingert: "I'm fortunate to have had such a great relationship with Mr. Noble and the entire AEL team, and I'm looking forward to partnering with them in the future on products and services for agents."

Biographical information concerning Ms. Richardson, Ms. Carlson, Mr. Matovina and Mr. Grensteiner is as follows:

Debra J. Richardson has served as Senior Vice President and Secretary of AEL and American Equity Life since 1996. At the Company's inception, Ms. Richardson became its second employee after Mr. Noble. She has served as a Director of AEL since September 2008 and as a Director of American Equity Life since June 1996. Ms. Richardson has over thirty years experience in the insurance industry, including nineteen years with The Statesman Group, Inc. ("Statesman") where she served in various positions including vice president-Shareholder/Investor Relations and Secretary.

Wendy L. Carlson has served as Chief Financial Officer and General Counsel of AEL and American Equity Life since June 1999. She has served as a Director of AEL since September 2008 and as a Director of American Equity Life since June 2006. Prior to joining AEL, Ms. Carlson was a member of the law firm of Whitfield & Eddy, PLC, where she practiced law in the areas of insurance, finance, securities and taxation. Ms. Carlson acted as outside counsel to American Equity from 1995, when it was formed, until she joined the company in 1999. Ms. Carlson is also a certified public accountant.

John M. Matovina has served as Vice Chairman of AEL since June 2003. Prior to being appointed Vice Chairman, Mr. Matovina was a private investor since 1996 and a financial consultant to the Company from 1997 to 2000. He has served as a Director of AEL since June 2000 and as a Director of American Equity Life since June 2003. From November 1983 through November 1996, he was a senior financial officer of Statesman and many of its subsidiaries, and prior to Statesman's acquisition in September 1994, he served as Statesman's Chief Financial Officer, Treasurer and Secretary. Mr. Matovina is a certified public accountant and has more than 25 years experience in the accounting and insurance industries.

Ron Grensteiner has served as Senior Vice President of Marketing for American Equity Life since November 1996. At the Company's inception, he and Mr. Wingert comprised its marketing department and together with Mr. Noble built American Equity Life's agency force which today stands at over 46,000 licensed, independent sales agents. Prior to joining American Equity Life, Mr. Grensteiner was a senior marketing officer of Statesman's principal operating subsidiary. Mr. Grensteiner has over 30 years experience in the insurance industry.

ABOUT AMERICAN EQUITY

American Equity Investment Life Holding Company, through its wholly-owned operating subsidiaries, is a full-service underwriter of a broad line of annuity and insurance products with a primary emphasis on the sale of fixed-rate and index annuities. The company's headquarters are located at 5000 Westown Parkway, West Des Moines, Iowa, 50266. The mailing address of the company is: P.O. Box 71216, Des Moines, Iowa, 50325. For more information, visit our website www.american-equity.com.

SOURCE: American Equity Investment Life Holding Company

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American Equity's Third Quarter 2008 Operating Income Increases 41% to $23.1 Million

2008-11-14T17:24:00.001-08:00

American Equity - News Article
WEST DES MOINES, Iowa--(BUSINESS WIRE)--Nov. 5, 2008--American Equity Investment Life Holding Company (NYSE: AEL), a leading underwriter of fixed-rate and index annuities, today reported 2008 third quarter operating income(1) of $23.1 million, or $0.42 per diluted common share, an increase of 41% over third quarter 2007 operating income of $16.4 million, or $0.28 per diluted common share. Performance results for the third quarter of 2008 include:

-- Book value per common share outstanding of $9.92 including
Accumulated Other Comprehensive Loss

-- Annuity sales of $571.8 million, an increase of 5% over third
quarter 2007 annuity sales of $543.8 million

-- Investment earnings of $210.0 million, an increase of 14% over
third quarter 2007 investment earnings of $183.7 million

-- Aggregate gross spread on annuity reserves of 2.83%, an
increase of 11% over third quarter 2007 aggregate gross spread
of 2.55%

The net loss for the third quarter of 2008 was $11.0 million or $0.19 per diluted common share compared to net income of $3.4 million or $0.06 per diluted common share for the same period in 2007. The net loss for the third quarter of 2008 included $39.2 million of realized losses, net of taxes and adjustments to the amortization of deferred acquisition costs and deferred sales inducements, on investments due principally to "other than temporary impairments". This amount also includes a $22.5 million increase in income tax expense for the establishment of a valuation allowance on deferred tax assets. The 2008 and 2007 quarters were also impacted by the effects of SFAS 133, dealing with fair value changes in derivatives and embedded derivatives. The net effect of SFAS 133 was a decrease in the third quarter 2008 net loss of $5.1 million compared to a $13.2 million reduction in third quarter 2007 net income.

MORE THAN ADEQUATE RISK-ADJUSTED CAPITAL

On October 30, 2008 A.M. Best announced that it has affirmed AEL's A- (Excellent) financial strength rating while revising the outlook on the rating from stable to negative in light of present market uncertainties. In affirming the A- (Excellent) rating A.M. Best cited the company's "more than adequate level of risk-adjusted capitalization" for this rating. The statutory capital and surplus of AEL's primary operating subsidiary was $898 million at September 30, 2008 compared to $991 million at December 31, 2007 reflecting the statutory accounting impacts of year-to-date net realized losses on invested assets and accelerated recognition of expense associated with options purchased to fund index credits on index annuities due to the decline in fair value of such options.

Commented David J. Noble, Chairman, Chief Executive Officer and President of AEL: "At $898 million of statutory capital and surplus, American Equity is adequately capitalized to support continued growth in sales at the present pace of approximately $200 million per month. By focusing on credit quality in our invested assets, we have been able to absorb the impact of falling asset values with very little problem. In my 50 years in the insurance industry I've survived many market cycles, and I'm confident that American Equity is well-postured to navigate through the present turmoil." AEL's management has no plans at present to raise additional capital through the issuance of debt or equity securities.

STRONG LIQUIDITY

AEL continues to have strong liquidity with deposits from new sales exceeding surrenders, withdrawals and death claims by approximately $890 million (including coinsurance receipts) for the first nine months of 2008. As a percentage of annuity contract values, outflows from surrenders, withdrawals and death claims for the third quarter of 2008 were at or below the average of each of the last 11 quarters beginning January 1, 2006. In addition, approximately $150 million of cash was provided by operating activities for the first nine months of 2008. At October 31, 2008, the company had drawn $75 million under its line of credit to fund repurchases of common stock and convertible senior debt, and may draw an additional $75 million under this line of credit prior to its maturity in October 2011, which is the earliest any of AEL's outstanding debt becomes due. Because the line of credit has been used in part to repurchase outstanding debt, AEL's ratio of adjusted debt to total capitalization has not increased during 2008 and in fact declined slightly to 29.9% at September 30, 2008 compared to 30.2% at December 31, 2007.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to future operations, strategies, financial results or other developments, and are subject to assumptions, risks and uncertainties. Statements such as "guidance," "expect," "anticipate," "believe," "goal," "objective," "target," "may," "should," "estimate," "projects," or similar words as well as specific projections of future results qualify as forward-looking statements. Factors that may cause our actual results to differ materially from those contemplated by these forward looking statements can be found in the company's Form 10-K filed with the Securities and Exchange Commission. Forward-looking statements speak only as of the date the statement was made and the company undertakes no obligation to update such forward-looking statements. There can be no assurance that other factors not currently anticipated by the company will not materially and adversely affect our results of operations. Investors are cautioned not to place undue reliance on any forward-looking statements made by us or on our behalf.

CONFERENCE CALL

American Equity will hold a conference call to discuss third quarter 2008 earnings on Thursday, November 6, 2008, at 10 a.m. CST. The conference call will be webcast live on the Internet. Investors and interested parties who wish to listen to the call on the Internet may do so at www.american-equity.com. The call may also be accessed by telephone at 1-866-713-8307, passcode 22461740 (international callers, please dial 1-617-597-5307). An audio replay will be available shortly after the call on AEL's web site. An audio replay will also be available via telephone through November 27, 2008 by calling 1-888-286-8010, passcode 27418323 (international callers will need to dial 1-617-801-6888).

ABOUT AMERICAN EQUITY

American Equity Investment Life Holding Company, through its wholly-owned operating subsidiaries, is a full-service underwriter of a broad line of annuity and insurance products with a primary emphasis on the sale of index and fixed-rate annuities. The company's headquarters are located at 5000 Westown Parkway, West Des Moines, Iowa, 50266. The mailing address of the company is: P.O. Box 71216, Des Moines, Iowa, 50325. For more information, visit our website www.american-equity.com.

(1) In addition to net income (loss), American Equity has consistently utilized operating income, a non-GAAP financial measure commonly used in the life insurance industry, as an economic measure to evaluate its financial performance. Operating income equals net income (loss) adjusted to eliminate the impact of (i) net realized gains and losses on investments including related deferred tax valuation allowance; and (ii) the impact of SFAS 133, dealing with fair value changes in derivatives and embedded derivatives. Because these items fluctuate from quarter to quarter in a manner unrelated to core operations, American Equity believes a measure excluding their impact is useful in analyzing operating trends. American Equity believes the combined presentation and evaluation of operating income together with net income (loss), provides information that may enhance an investor's understanding of American Equity's underlying results and profitability. A reconciliation of net income (loss) to operating income is provided in the accompanying tables.

American Equity Investment Life Holding Company
-------------------------------------------------

Net Income/Operating Income (Unaudited)
-------------------------------------------------

Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
2008 2007 2008 2007
--------- --------- ---------- ---------
(Dollars in thousands, except per share
data)
Revenues:
Traditional life and
accident and health
insurance premiums $ 3,223 $ 3,344 $ 9,419 $ 9,591
Annuity product charges 13,328 12,576 37,271 33,023
Net investment income 209,978 183,732 607,546 528,809
Realized gains (losses)
on investments (58,974) 325 (91,412) 921
Change in fair value of
derivatives (83,753) (10,709) (314,431) 79,755
--------- --------- ---------- ---------
Total revenues 83,802 189,268 248,393 652,099

Benefits and expenses:
Insurance policy benefits
and change in future
policy benefits 2,126 2,360 7,056 6,390
Interest credited to
account balances 50,387 165,821 154,032 449,915
Amortization of deferred
sales inducements 6,760 565 34,193 16,528
Change in fair value of
embedded derivatives (37,100) (19,829) (237,969) (11,476)
Interest expense on notes
payable 3,881 4,039 11,732 12,178
Interest expense on
subordinated debentures 4,669 5,673 14,549 16,876
Interest expense on
amounts due under
repurchase agreements 2,698 4,764 7,694 11,842
Amortization of deferred
policy acquisition costs 19,285 9,013 118,595 60,948
Other operating costs and
expenses 13,490 11,582 38,308 37,076
--------- --------- ---------- ---------
Total benefits and expenses 66,196 183,988 148,190 600,277
--------- --------- ---------- ---------

Income before income taxes 17,606 5,280 100,203 51,822
Income tax expense 28,608 1,837 57,286 17,848
--------- --------- ---------- ---------
Net income (loss) (11,002) 3,443 42,917 33,974
Realized (gains) losses on
investments, net of offsets 39,222 (210) 49,140 (595)
Net effect of SFAS 133, net
of offsets (5,105) 13,189 (32,531) 14,503
--------- --------- ---------- ---------

Operating income (a) $ 23,115 $ 16,422 $ 59,526 $ 47,882
========= ========= ========== =========

Earnings (loss) per common
share $ (0.21) $ 0.06 $ 0.79 $ 0.60
Earnings (loss) per common
share - assuming dilution $ (0.19) $ 0.06 $ 0.77 $ 0.58
Operating income per common
share (a) $ 0.44 $ 0.29 $ 1.10 $ 0.84
Operating income per common
share - assuming dilution
(a) $ 0.42 $ 0.28 $ 1.06 $ 0.81

Weighted average common
shares outstanding (in
thousands):
Earnings per common share 52,916 56,878 54,075 56,899
Earnings per common share
- assuming dilution 55,835 59,774 56,953 60,081

American Equity Investment Life
Holding Company
----------------------------------

Operating Income
Three months ended September 30,
2008 (Unaudited)
----------------------------------

Adjustments Operating
------------------------
As Reported Realized Losses SFAS 133 Income (a)
----------- --------------- -------- ----------
(Dollars in thousands, except per share data)
Reserves:
Traditional life
and accident and
health insurance
premiums $ 3,223 $ - $ - $ 3,223
Annuity product
charges 13,328 - - 13,328
Net investment
income 209,978 - - 209,978
Realized losses on
investments (58,974) 58,974 - -
Change in fair
value of
derivatives (83,753) - 16,813 (66,940)
----------- --------------- -------- ----------
Total revenues 83,802 58,974 16,813 159,589

Benefits and expenses:
Insurance policy
benefits and
change in future
policy benefits 2,126 - - 2,126
Interest credited
to account
balances 50,387 - 720 51,107
Amortization of
deferred sales
inducements 6,760 13,496 (6,859) 13,397
Change in fair
value of embedded
derivatives (37,100) - 37,100 -
Interest expense on
notes payable 3,881 - (243) 3,638
Interest expense on
subordinated
debentures 4,669 - - 4,669
Interest expense on
amounts due under
repurchase
agreements 2,698 - - 2,698
Amortization of
deferred policy
acquisition costs 19,285 19,566 (5,743) 33,108
Other operating
costs and expenses 13,490 - 60 13,550
----------- --------------- -------- ----------
Total benefits and
expenses 66,196 33,062 25,035 124,293
----------- --------------- -------- ----------

Income before income
taxes 17,606 25,912 (8,222) 35,296
Income tax expense 28,608 (13,310) (3,117) 12,181
----------- --------------- -------- ----------

Net income (loss) $ (11,002) $ 39,222 $(5,105) $ 23,115
=========== =============== ======== ==========

Earnings (loss) per
common share $ (0.21) $ 0.44
Earnings (loss) per
common share -
assuming dilution $ (0.19) $ 0.42

(a) In addition to net income, we have consistently utilized operating
income, operating income per common share and operating income
per common share - assuming dilution, non-GAAP financial measures
commonly used in the life insurance industry, as economic
measures to evaluate our financial performance. Operating income
equals net income adjusted to eliminate the impact of net
realized gains and losses on investments, and the impact of SFAS
133, dealing with fair value changes in derivatives and embedded
derivatives. Because these items fluctuate from quarter to
quarter in a manner unrelated to core operations, we believe
measures excluding their impact are useful in analyzing operating
trends. We believe the combined presentation and evaluation of
operating income together with net income, provides information
that may enhance an investor's understanding of our underlying
results and profitability.

CONTACT: American Equity Investment Life Holding Company
Debra J. Richardson, 515-273-3551
Sr. Vice President
drichardson@american-equity.com
or
John M. Matovina, 515-457-1813
Vice Chairman
jmatovina@american-equity.com
or
D. J. Noble, 515-457-1705
Chairman
dnoble@american-equity.com
or
Julie L. LaFollette, 515-273-3602
Investor Relations
jlafollette@american-equity.com

SOURCE: American Equity Investment Life Holding Company

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A.M. Best Affirms American Equity's A- (Excellent) Financial Strength Rating

2008-11-14T17:12:00.001-08:00

American Equity - News Article
A.M. Best Affirms American Equity's A- (Excellent) Financial Strength Rating; Revises Outlook to Negative, Consistent with Life Industry Outlook

WEST DES MOINES, Iowa--(BUSINESS WIRE)--Oct. 30, 2008--American Equity Investment Life Holding Company (NYSE: AEL), today announced that A.M. Best Company affirmed its financial strength rating of A- (Excellent) while revising the outlook to negative from stable. In affirming the rating, A.M. Best recognized AEL's:

-- More than adequate level of risk-adjusted capitalization

-- Consistently positive GAAP operating results

-- Leading position in the fixed-index annuity segment

-- Favorable surrender charge protection in its annuity business

-- Good asset liability management program including the hedging
of risks associated with its fixed-indexed annuity business

-- Overall business scale that was achieved over the past ten
years

The revision of the ratings outlook is consistent with A.M. Best's negative outlook on the life insurance industry as a whole. As to AEL, A.M. Best noted that while the company's investments in commercial loans have performed as expected to date, in A.M. Best's view, such loans are exposed to heightened financial risks as a result of macroeconomic challenges. In addition, A.M. Best expressed concern over possible volatility in investment earnings and spreads. In response to these questions, AEL is providing the following additional information regarding its commercial mortgage loans and spread management in the current environment.

As of September 30, 2008, AEL had $2.3 billion of commercial mortgage loans representing 17.4% of invested assets. This group of mortgage loans is made up of over 950 individual loans with an average size of $2.4 million per loan. At present all of AEL's commercial mortgage loans are fully performing in accordance with their terms and no facts exist indicating that losses or impairments of value will be recognized in the near term. In addition, these loans have the following characteristics as of September 30, 2008:

-- Weighted average book yield of 6.38%

-- Weighted average loan-to-value ratio of 59.7% based on
appraised values

-- For loans closed in 2008, weighted average loan-to-value ratio
of 56.9% based on appraised values

-- Weighted average debt service coverage ratio of 1.55 times

-- Personal recourse in 55% of loans

-- 25% cash borrower equity required in substantially all cases

-- No interest-only payment schedules, target fully amortizing
loans

-- No defaults, no payment delinquencies longer than 30 days, and
no restructuring of loans

-- Well-diversified by property type and geographic region

AEL continues to view its commercial loans as high quality assets with duration and cash flow characteristics that are well matched to AEL's annuity liabilities.

Gross investment spread (yield on invested assets minus cost of money on annuity liabilities) has been improving throughout 2008 as a result of both an increase in the average yield on invested assets as well as a reduction in the cost of money for annuity liabilities. Spread results for the quarter and nine months ending September 30, 2008 compared to the same periods in 2007 are as follows:

Spread Results
---------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2008 2007 2008 2007
--------- -------- -------- --------

Average yield on invested assets 6.20% 6.09% 6.18% 6.09%

Cost of money
---------------------------------
Aggregate 3.37% 3.54% 3.45% 3.44%
Cost of money for index annuities 3.36% 3.55% 3.46% 3.42%
Average crediting rate for fixed-
rate annuities
Annually adjustable 3.26% 3.30% 3.26% 3.28%
Multi-year rate guaranteed 3.85% 4.09% 3.90% 4.18%

Investment spread
---------------------------------
Aggregate 2.83% 2.55% 2.73% 2.65%
Index annuities 2.84% 2.54% 2.72% 2.67%
Fixed-rate annuities
Annually adjustable 2.94% 2.79% 2.92% 2.81%
Multi-year rate guaranteed 2.35% 2.00% 2.28% 1.91%

While equity market volatility has risen dramatically in October 2008, AEL's average cost of money on its index annuities was 3.29% for the first three weeks of October, reflecting the facts that: (i) there has been no cost increase in a significant category of option purchases; and (ii) policyholders are electing to allocate a larger percentage of their index annuity fund values to the fixed interest crediting strategy within the products, with the fixed interest rate at 3.25%.

Additional detail on results of operations for the third quarter of 2008 will be discussed in the company's earnings call scheduled to occur on November 6, 2008.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to future operations, strategies, financial results or other developments, and are subject to assumptions, risks and uncertainties. Statements such as "guidance," "expect," "anticipate," "believe," "goal," "objective," "target," "may," "should," "estimate," "projects," or similar words as well as specific projections of future results qualify as forward-looking statements. Factors that may cause our actual results to differ materially from those contemplated by these forward looking statements can be found in the Company's Form 10-K filed with the Securities and Exchange Commission. Forward-looking statements speak only as of the date the statement was made and the Company undertakes no obligation to update such forward-looking statements. There can be no assurance that other factors not currently anticipated by the Company will not materially and adversely affect our results of operations. Investors are cautioned not to place undue reliance on any forward-looking statements made by us or on our behalf.

ABOUT AMERICAN EQUITY

American Equity Investment Life Holding Company, through its wholly-owned operating subsidiaries, is a full-service underwriter of a broad line of annuity and insurance products with a primary emphasis on the sale of index and fixed-rate annuities. The company's headquarters are located at 5000 Westown Parkway, West Des Moines, Iowa, 50266. The mailing address of the company is: P.O. Box 71216, Des Moines, Iowa, 50325. For more information, visit our website www.american-equity.com

CONTACT: American Equity Investment Life Holding Company
Debra J. Richardson, 515-273-3551
Sr. Vice President
drichardson@american-equity.com
or
John M. Matovina, 515-457-1813
Vice Chairman
jmatovina@american-equity.com
or
D. J. Noble, 515-457-1705
Chairman
dnoble@american-equity.com
or
Julie L. LaFollette, 515-273-3602
Investor Relations
jlafollette@american-equity.com

SOURCE: American Equity Investment Life Holding Company

Annuity Definition
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Index Annuity

Rule 151a SEC to hear more on fixed indexed annuity regulation

2008-10-13T14:10:00.001-07:00

SEC to hear more on index annuity regulation - InvestmentNews
By Darla Mercado
October 13, 2008, 3:47 PM EST

The Securities and Exchange Commission has reopened the comment period for its proposed rule on federal regulation of index annuities.

The Washington-based regulator made the announcement on Friday, giving the public thirty days from the publication of the extension in the Federal Register.

The rule, known as 151 A, would define the terms “annuity contract” and “optional annuity contract” under the Securities Act of 1933, clarifying index annuities’ status under the federal securities laws.

Were the rule to be approved, the products would come under the jurisdiction of the SEC and the Financial Industry Regulatory Authority Inc. of New York and Washington.

Comments may be submitted here.

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Fixed Index Annuity Sales for AEL

2008-10-11T07:12:00.001-07:00

AMEB,AEL American Equity: Year-to-Date Annuity Sales Up 6% From Year Ago
American Equity: Year-to-Date Annuity Sales Up 6% From Year Ago

WEST DES MOINES, Iowa, Oct 07, 2008 (A. M. Best via COMTEX) -- AEL | Quote | Chart | News | PowerRating -- American Equity Investment Life Holding Co., a top seller of equity-indexed annuities in the United States, said year-to-date annuity sales rose 6% from the same period a year ago.

Ahead of releasing its third-quarter earnings next month, American Equity (NYSE: AEL | Quote | Chart | News | PowerRating) on Oct. 3 said annuity sales for the quarter totaled $571.8 million, bringing year-to-date sales to $1.7 billion for the first nine months of this year, up from $1.6 billion in the same period in 2007.

At the end of trading Oct. 6, American Equity Investment Life led the A.M. Best Global Insurance Composite Index -- up 17.93% from the previous close. The A.M. Best Global Index closed at 859.99 -- down 6.72%.

The West Des Moines, Iowa-based company will release third-quarter earnings Nov. 5 after the market closes. For year-end 2007, American Equity's net income declined 61.6% to $29 million, while total revenues dropped to $915.9 million, a decrease of 22%.

Debate surrounds indexed annuities. Back in June, the U.S. Securities and Exchange Commission proposed a rule, 151A, that would define certain indexed annuities as securities products. Under the rule, these annuities ? currently regulated as insurance products ? would be treated as securities if amounts payable by the insurer are more likely than not to exceed amounts guaranteed under the contract.

Insurance carriers would need to refile the products with the SEC and offer them via a prospectus. Agents who wish to continue selling them would need to become registered representatives overseen by the Financial Industry Regulatory Authority, a status held by only about 55% of those who currently sell the products (BestWire, Sept. 8, 2008).

The comment period for the SEC's proposal ended Sept. 10. As of that day, 2,400 comments were sent to the SEC and about 90% were in opposition, American Equity said. The SEC has continued to accept comments received after the deadline, it said.

American Equity said it co-hosted a Congressional "fly-in" in Washington, D.C., on Sept. 23 in which the Coalition for Indexed Products, made up nine companies and a group of national marketing organizations representing the coalition, met with nearly 80 members of Congress. They urged members to tell the SEC the measure isn't needed because indexed annuity sales "are already heavily regulated by state insurance departments and would restrict consumer choice at a time when access to principal-protected products like fixed-index annuities should be carefully guarded," American Equity said.

The SEC, which adopted the proposed rule unanimously, has pointed to allegations of abuses in the marketing of indexed annuities to seniors, and has sought supervision by the Financial Industry Regulatory Authority of those who sell the products. According to the SEC, among complaints made to state securities regulators, cases involving annuities represented 65% of the caseload in Massachusetts, and 60% of the caseload in Hawaii and Mississippi (BestWire, July 28, 2008).

(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)

Annuity Index Annuity Fixed Annuity

Income Annuities - Women's financial security in retirement

2008-10-11T07:00:00.001-07:00

Advice for men and women about women's financial security in retirement - The Boston Globe

I've thought about dying before my wife Georgina after reading two recent studies on women and retirement.

"Compared with men, women will likely have lower retirement savings yet they'll need to make those savings last longer and plan on being on their own at some point," concludes "Why Women Worry," part of ongoing research on retirement issues by the financial firm The Hartford and MIT's AgeLab.

On average, a woman, 65, can expect to live to 85, about three years longer than men, and has a 23 percent chance of living past 95, based on mortality tables.

"When a woman outlives her husband, her income decreases by 50 percent on average yet expenses only decrease by 20 percent," the study said.

The second study, "Lifetime Income for Women: A Financial Economist's Perspective," was authored by David Babbel, a professor at the Wharton School of Business, and cosponsored by New York Life Insurance Co.

Babbel argues women should allocate substantially less money to stocks and stock mutual funds in retirement and more to immediate annuities that guarantee an income for life in return for a lump-sum premium.

"Annuities are even more important for women because their risks are compounded by longer life expectancy as well as potentially outliving husbands by six years or more (wives tend to be younger than their husbands)," said Babbel. He concludes that income annuities from top-rated insurance companies can provide secure lifetime income for 25 to 40 percent less money than it would take an individual.

That's because insurance companies base their payouts on average life expectancies (premiums from those who die early subsidize payments to those who live longer). When we invest on our own, we must plan for our money to last several years beyond life expectancy, just in case.

For this reason, financial planners often recommend retirees withdraw no more than 4 percent of savings the first year of retirement, increasing the amount by 3 percent a year to counteract inflation.

But, several top-rated insurance companies offer lifetime annuities with payout rates of 5 percent or more the first year for a 65-year-old couple, raising the amount 3 percent a year and with a "refund" feature (if both spouses die before income payments equal the premium, a beneficiary gets the difference).

But with income annuities, we typically give up our principal and can't access it beyond the scheduled income payments. Some contracts allow exceptions at the cost of lowering income.

In all states, guaranty associations belonging to the National Organization of Life and Health Guaranty Associations back income annuity obligations up to a limit ($100,000 or more per company depending on the state) per policyholder if an insurance company goes bankrupt.

Humberto Cruz is a syndicated columnist. He can be reached at askhumberto@aol.com.

Fixed Annuity

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Annuity Information

FDIC May Need $150 Billion Bailout as More Banks Fail

2008-10-01T16:44:00.001-07:00

FDIC May Need $150 Billion Bailout as More Banks Fail (Update3)

By David Evans
More Photos/Details

Sept. 25 (Bloomberg) -- Deborah Horn tugs on the handle of the glass-paned entrance of the IndyMac Bancorp Inc. branch in Manhattan Beach, California. The door won't budge. The weekend is approaching, and Horn, 44, the sole breadwinner in a family of three, needs cash.

A small notice taped to the window on this Friday afternoon in mid-July tells her why she's been locked out. IndyMac has failed, the single-spaced, letter-sized paper says; the bank is now in the hands of the Federal Deposit Insurance Corp.

``The Receiver is now taking possession of the Bank,'' the sign says.

``I'm physically shaking,'' says Horn, an academic tutor, as she peers into the bank. Inside, an FDIC examiner is talking to six stone-faced IndyMac employees. ``I don't know when I'm going to be able to get my money,'' Horn says. ``I'm a single mom. This is the money I live on.''

Don't worry about Horn. She'll be all right, as will most of Pasadena, California-based IndyMac's 200,000-plus customers.

That's because the FDIC, created in 1934, insures all accounts up to $100,000 at its member banks, and it has never failed to honor a claim. The people to worry about are U.S. taxpayers.

The IndyMac debacle is taking a large bite out of FDIC reserves, and if scores of other banks fail in the year ahead, the fund will be depleted. Taxpayers will have to step in.

Worst Wave

Americans had gotten used to the idea that bank failures were as rare as a category five hurricane. No banks went bust in 2005 or 2006. Seven collapsed in 2007 as the credit crisis began to exact a toll. So far in 2008, 12 more, with total assets of $42 billion, have fallen -- that's the worst wave of bank failures since 1992.

IndyMac, which had $32 billion in assets when it went into receivership, is the most expensive bank failure the FDIC has ever covered. And that record may not stand for long.

By the end of 2009, about 100 U.S. banks with collective assets of more than $800 billion will fail, predicts Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance, California-based firm that sells its analysis of FDIC data to investors.

``It's not going to be Armageddon,'' says Mark Vaughan, a financial economist at the Federal Reserve Bank of Richmond, Virginia and a senior lecturer in economics at Washington University in St. Louis. ``But it's going to be bad.''

FDIC's Secret List

The FDIC knows which banks are at risk; it has a watch list with 117 institutions. The agency won't disclose their names because doing so could cause depositors to panic and pull out all of their funds.

It won't take many more failures before the FDIC itself runs out of money. The agency had $45.2 billion in its coffers as of June 30, far short of the $200 billion Whalen says it will need to pay claims by the end of next year. The U.S. Treasury will almost certainly come to the rescue by lending money to the FDIC.

Regardless of who wins control of the White House and Congress in November, no politician is likely to vote in favor of leaving federally insured depositors out in the cold.

A taxpayer bailout of the FDIC would come on the heels of intervention by the U.S. Treasury Department and Federal Reserve to save investment bank Bear Stearns Cos., mortgage giants Fannie Mae and Freddie Mac and the world's largest insurer, American International Group Inc.

Uninsured Deposits

Emergency federal lending to the FDIC could swell the cost of government rescues of failed financial institutions to more than $400 billion -- not including the $700 billion general Wall Street bailout now under discussion in Congress. Under federal statute, the FDIC must pay back any loans from the Treasury.

That number would be even higher if the government were on the hook for uninsured deposits -- which amount to $2.6 trillion, 37 percent of the total of $7 trillion held in the U.S. branches of all FDIC member banks.

The subprime crisis -- which started in the suburbs of California and Florida and migrated through the alchemy of securitization to Wall Street investment banks -- has come almost full circle, spreading its toxins to the very lenders who first extended those teaser-rate, no-document mortgages to homeowners.

In 2006, IndyMac was the largest provider of mortgages that didn't require borrowers to provide proof of their incomes. And as of mid-September, investors were worried that Washington Mutual Inc., the biggest thrift in the U.S., would be the next bank to go belly up.

A federal takeover of Washington Mutual, which has assets of $310 billion, could cost taxpayers $24 billion more, according to Richard Bove, an analyst at Miami-based Ladenburg Thalmann & Co.

Slower To Hit

The reckoning that has run through Wall Street, claiming investment banks Lehman Brothers Holdings Inc. and Bear Stearns among its victims, has been slower to hit Main Street. In mid- 2007, Wall Street firms began disclosing losses on their packages of securitized home loans.

From August 2007 to September 2008, banks worldwide wrote down more than $500 billion. Regional banks, by contrast, have waited to write off their bad mortgages, hoping the housing market would improve and defaults would level off. Instead, they've risen.

FDIC-insured banks charged off $26.4 billion of bad loans in the second quarter of 2008, the most since 1991.

U.S. lenders, in their embrace of subprime lending, committed the same analytical fallacy as their Wall Street counterparts. When it came to assessing risk, they relied on the recent past to predict the near future.

Living in the Past

They were blinded by years of rising home prices and low mortgage default rates.

The FDIC fell into the same trap. As recently as March, an internal FDIC memo estimated the cost to cover bank collapses in 2008 would be just $1 billion, dropping to $450 million in 2009. It wasn't even close.

The IndyMac failure alone, which happened four months after that memo was circulated, will cost the FDIC $8.9 billion -- and the bill for all 12 collapses will be about $11 billion, the FDIC says.

FDIC Chairman Sheila Bair says the agency's forecast was based on models using data from the past 20 years, which included long periods with few bank failures.

``Given the change in economic conditions, we need to weight the more recent data more heavily,'' Bair says. ``You also need a good dose of common sense.''

Bair says depositors shouldn't fret about their banks. ``We do have a handful with some significant challenges,'' she says. ``Overall, banks are quite safe and sound.''

Bair is duty bound to say that, says Joseph Mason, an economist who worked for the Treasury from 1995 to 1998. Part of the FDIC's job is to reassure the public and prevent runs on banks. Mason says Bair's rhetoric masks the agency's inability to grasp the scope of the coming crisis.

`Ignoring the Problem'

``The FDIC and the banking regulators are ignoring the problems, hoping they'll go away,'' he says. ``They won't.''

The quake that shook markets in September may make the FDIC's task more complicated and expensive. With investment banks in eclipse, deposit-taking institutions will now play a larger role in financing the economy.

Earlier this month, Bank of America Corp. agreed to buy Merrill Lynch & Co. for $50 billion, and Wachovia Corp. and Morgan Stanley were in talks about a potential merger.

'Would Be Miraculous'

From 2002 to 2007, U.S. lenders made a total of $2.5 trillion in subprime mortgages, according to the newsletter Inside Mortgage Finance. ``Given the magnitude of the bad loans still on bank balance sheets, it would be miraculous for the FDIC to squeak by with losses of less than $200 billion,'' Whalen says.

On Sept. 18, in yet another stunning turn of events, Paulson proposed a plan that would cost the government, if not necessarily the FDIC, hundreds of billions of dollars more.

The Treasury secretary says the government will purchase toxic mortgage debt from banks in an effort to cleanse the financial system. In an unprecedented move, the Treasury also pledged $50 billion to insure nonbank money market funds.

Bair says Paulson's plan won't reduce the number of banks on the FDIC's watch list.

One reason the rolling financial crisis is hitting regional banks later than it walloped Wall Street is because the very system that is meant to protect depositors -- federal insurance -- has also served to prop up weak lenders. So has the ready supply of credit extended to banks by another government-chartered group, the Federal Home Loan Banks.

Because all deposits up to $100,000 are insured, most savers can be agnostic about where they put their money. They don't have to know -- or care -- whether a bank is making sound or foolish loans.

Unlike buyers of stocks or bonds, people who put their money in banks rarely do research about the soundness of the institution. That makes it easy for banks -- both prudent and reckless ones -- to raise cash.

Brokered Deposits Loophole

Banks have taken the FDIC's protection and run with it, thanks to the phenomenon of brokered deposits -- and a giant loophole in federal regulations.

As of June 30, Whalen says banks held $644 billion from brokers who offer customers a way to gain FDIC insurance for multiple accounts.

Promontory Interfinancial Network LLC, an Arlington, Virginia-based company founded in 2002 by former federal officials --including some from the FDIC itself -- has figured out how to help wealthy clients insure as much as $50 million each by putting their money into separate accounts at 500 different banks.

While the law does limit insurance to $100,000 per account, it places no ceiling on the number of different banks where an individual can hold accounts -- a loophole Congress failed to close even after the savings and loan debacle of 1984-1992.

Missing Discipline

Bair says brokered deposits can provide quick cash but also create potential danger.

``It is quite easy to get brokered deposits, and there's not a lot of market discipline with the brokered deposits,'' she says. ``When there's excessive reliance on them, particularly to fuel rapid growth on the balance sheet, that's definitely a high-risk factor.''

The other big source of money for banks is the FHLB, an under-the-radar network of 12 regional banks created by Congress in 1932 to help lenders finance mortgages. Lenders had borrowed a total of $840.6 billion from the FHLB system as of June 30, up 38 percent from $608 billion in the same period a year earlier.

Treasury Secretary Henry Paulson, in a little-noticed action on Sept. 7, the day after he announced the bailout of Fannie and Freddie, extended a secured credit line to the FHLB to provide an emergency source of funding if needed.

FHLB Advances

Vaughan says credit from the FHLB is keeping some sick banks afloat and postponing the inevitable.

`What's going to happen,'' he says, ``is that weak banks will use FHLB advances to avoid discipline from funding markets. In some cases, that will keep their doors open longer than they otherwise would, all-the-while offloading more and more potential losses onto the FDIC and taxpayers.''

Normally, the FDIC is no more than four initials customers see when they walk into their banks. In recent years, the agency hasn't had to close many banks, as it collected small amounts of insurance premium payments.

President Franklin D. Roosevelt signed the law creating the FDIC in the middle of the Depression. As part of the New Deal, Congress created a system of federal insurance to end bank runs by reassuring the public that depositing money in banks was safe. All banks paid the same rate for insurance.

Wave of Failures

The FDIC shares regulatory authority with other agencies. The Office of Thrift Supervision oversees federally chartered savings and loans, the Comptroller of the Currency monitors national banks, and state banking regulators review state- chartered banks.

The FDIC is the only one of these agencies that insures deposits.

By and large, the government's insurance system worked until the 1980s, when thrifts went on a commercial real estate lending binge, triggering a wave of failures and consolidation that lasted from 1984 to 1992.

In 1991, Congress changed the way FDIC premiums were assessed, requiring banks to pay rates based on how well capitalized they were for the risks they faced. As bank failures subsided to less than a dozen a year by 1995, the FDIC's reserves began to swell.

As a result, the agency cut to zero the premiums it charged to the 90 percent of the banks deemed safest. That free ride continued for 10 years.

`No Good Way'

In 2006, Congress increased insurance payments for most banks, averaging $5-$7 per $10,000 of deposits.

The insurance premiums imposed by the FDIC on the riskiest banks -- running as high as $43 per $10,000 -- are still far below the rates private insurers would charge, says Sherrill Shaffer, former chief economist of the Federal Reserve Bank of New York.

At the same time, charging struggling banks a fair price for insurance premiums may drive them into insolvency, he says.

``That can be destabilizing,'' says Shaffer, who's now a professor of banking at the University of Wyoming in Laramie. ``There's really no good way around that. It's an issue that policy makers and analysts have wrestled with for decades.''

Bair says the FDIC is gearing up for the coming wave of bank failures. She says she's developing a plan to raise insurance premiums.

The agency's Division of Resolutions and Receiverships has boosted authorized staffing levels by 48 percent, to 331, this year. It has hired 178 new financial specialists and called up 65 retirees for temporary service under a special program.

Bair vs. Enron

Bair, 54, an attorney who graduated from the University of Kansas School of Law, has challenged financial institutions as a regulator for more than a decade. President George W. Bush nominated her as chairman, and she was sworn in on June 26, 2006.

She replaced Donald Powell, a former Texas banker. In 1992, as a member of the Commodity Futures Trading Commission, Bair cast the lone vote against Enron Corp.'s effort to exempt certain energy contracts from the agency's anti-fraud and anti- market manipulation enforcement powers.

Nine years later, Enron blew up in one of the biggest financial scandals in U.S. history.

As assistant secretary of the Treasury for financial institutions in 2002, Bair criticized abusive subprime mortgage brokers.

``Lenders have made loans with little or no regard for a borrower's ability to repay and have engaged in multiple refinance transactions that result in little or no benefit to a borrower,'' she told the Pittsburgh Community Reinvestment Group on March 18, 2002.

`Rock and Brock'

Bair has published two children's books. One of them, ``Rock, Brock, and the Savings Shock'' (Albert Whitman, 2006) is a tale of two twins -- Rock the Saver and Brock the Spender

To contact the reporter on this story: David Evans in Los Angeles at davidevans@bloomberg.net
Last Updated: September 25, 2008 19:54 EDT

Fixed Annuity Definition

Indexed Annuities - Protections for AIG Policyholders

2008-09-21T11:43:00.001-07:00

Protections for AIG Policyholders - WSJ.com
People with an annuity or a life-insurance, auto or homeowners policy through American International Group are no doubt mighty worried right now as they watch that company struggling.

But policyholders don't need to panic, experts say. For one thing, while the holding company is in financial distress, AIG's insurance subsidiaries are separate entities that are financially sound, regulators and others say.

AIG's insurance subsidiaries "did not receive a bailout; they are financially solvent," Sandy Praeger, president of the National Association of Insurance Commissioners, said in a statement last week. She added in an interview that "state insurance laws regulate the AIG subsidiaries to assure that the assets are preserved to protect the interests of policyholders."

Further, if an insurance company were to fail, each state runs an insurance guaranty association to protect policyholders. Insurers ante up fees to ensure customers of failed firms are protected. Still, those state guarantees are limited -- and that potentially could mean problems for some policyholders if an insurer becomes insolvent.

Your best bet now is to take a measured approach. Find out whether you're fully protected by state guarantees. Contact your state insurance department, or look up your state's rules at www.nolhga.com.

If you're not, weigh your options. Talk to your insurance broker about possible surrender charges or other penalties for exiting your policy or annuity, and determine the cost of purchasing similar products elsewhere. Remember that even consumers with policies worth more than their state's guaranteed limit may have nothing to worry about given that these insurers are solvent.
Life-Insurance Protections

State guaranty associations protect life-insurance policyholders for at least $100,000 in cash surrender or withdrawal value and at least $300,000 ($250,000 in California) in death benefits, says Peter Gallanis, president of the National Organization of Life and Health Insurance Guaranty Associations in Herndon, Va. Some states provide protection up to $500,000.

For policyholders within their state's limits, if a company fails, "there is a very good chance that your policy will be transferred [to a different insurer] and you'll never miss a beat," Mr. Gallanis says.

For fixed annuities, states generally cover up to $100,000, though some guarantee $300,000 or more.

Variable annuities are investment products. Generally your money is invested through a subaccount that is separate from the insurer's assets and not covered by state associations. However, the portion of the contract that promises a payout from the insurer usually is covered.

Usually a failed insurer's business is taken over by another company in what can be a seamless transition for policyholders, Mr. Gallanis says.

"Typically the new insurer will provide all of the protection that would have been provided under the old policy," he says.

But it is possible in some situations that people with life-insurance policies worth more than the state limits may find they're on the hook for a higher premium or a reduced death benefit, Mr. Gallanis says.

Similarly, it's possible an annuity contract might be modified by an acquiring company; for instance, if the promised interest rate is deemed too high. But that's a rare event, requires approval by regulators, and is much likelier when an insurance company's failure is rooted in its policy-writing practices.
Auto, Home Policies

There are similar state guaranty associations protecting consumers with homeowners and auto-insurance policies. If you have a claim filed with a company that then fails, "the guaranty fund steps into the shoes of the insurance company from a claims-paying perspective," says Roger Schmelzer, chief executive of the National Conference of Insurance Guaranty Funds in Indianapolis. Most state guaranty associations cover homeowners- and auto-policy claims up to $300,000, he says.

If you've prepaid a premium, that is also usually recoverable through the guaranty association, says Barb Cox, the group's vice president of legal and regulatory affairs, though the limit may be $10,000 or $25,000.

Meanwhile, if you're simply holding a policy, with no claims in process, then consider shopping around, Mr. Schmelzer says.

Read more at marketwatch.com

Write to Andrea Coombes at andrea.coombes@dowjones.com

Fixed Annuity

Failures of SEC Chairman Cox

2008-09-21T11:36:00.001-07:00

5 Failures of SEC Chairman Cox - Seeking Alpha
5 Failures of SEC Chairman Cox
by: Mark Sunshine

Almost all paths of incompetence in the current crisis run through the office of the Chairman of the SEC, Chris Cox. McCain’s solution to fire Cox isn’t tough enough. Exile is better. Fortunately for Cox this isn’t the Stalinist Soviet Union or his fate could be a lot worse.

Cox’s failures are too numerous to count. However, I’ll give it a try. Below are what I think are his top 5 failings.

1.

Failure to enforce disclosure laws and regulations.

Disclosure rules and regulations protect investors by requiring companies to disclose everything that is needed for informed investment decisions. And, CEOs and CFOs are required to sign certifications that such disclosure is materially accurate, complete, and that their companies have adequate internal controls to ensure such accuracy and completeness.

Enforcement of disclosure rules and regulations has been a joke. CEOs lie to shareholders with impunity and without fear of SEC enforcement. It is impossible to conclude that SEC filings for Freddie, Fannie, AIG, Lehman, or Bear Stearns complied with SEC rules and regulations.

However, instead of enforcement by the SEC, there is silence. While not all management actions are criminal, why hasn’t the SEC used its civil enforcement authority, i.e., assessing fines and penalties? How about protecting future investors by banning failed executives and boards of directors from serving in executive management at other public companies?
2.

Failure to enforce accounting standards.

When Cox states that the SEC doesn’t have regulatory authority over capital adequacy of financial services companies, he isn’t telling the truth. The SEC has regulatory authority over the financial statements of ALL publicly traded companies in the U.S. which of course includes the financials. If Cox had required greater reserves and transparency of financial services companies it would have happened.

Every quarter all publically traded companies file reports with the SEC that are provided to shareholders and the SEC has review and comment authority. If the SEC deems financial disclosure inadequate, incomplete or opaque it has the authority to force the company to amend its filings. It also has authority to establish accounting standards for publically traded companies which means it can have different requirements than GAAP.

So when the AIG filed its last quarterly report and decided that it didn’t need to have loan loss reserves against defaulting mortgages and securities, the SEC had the ability to require additional loan loss reserves. When Freddie and Fannie decided to pretend that defaulted mortgage were good assets because it changed its accounting standards, the SEC could have just said “no”. When Lehman manufactured $2.4 billion of pre-tax income by pretending that it wasn’t going to repay its debts (one of the dumber aspects of mark to market accounting), the SEC should have protected investors with disclosure.
3.

Failure to supervise the rating agencies.

Cox wants everyone to believe that despite being the rating agency’s only regulator, the SEC has no oversight or enforcement authority and cannot influence their performance. Once again, the SEC’s statements are false. Cox assumes that no one will take the time to read the Credit Rating Agency Reform Act of 2006 which states that the SEC has the right to suspend or revoke the license of any of rating agency for a wide range of reasons. Rating agency regulation and reform is Cox’s responsibility.
4.

Failure to investigate and prevent market manipulation, i.e., naked short selling.

Free markets are supposed to be honest markets. The naked short selling issue isn’t new and the SEC’s knee jerk emergency response is an embarrassment. The ban on short selling of 799 stocks is very similar to Putin’s actions this week to manipulate the Russian stock market. I haven’t a clue whether or not the uptick rule works, but I know that enforcing rules on naked short selling shouldn’t have required destructive and ill thought out emergency orders. In the middle of the 1800’s the legendary financial scoundrel, Daniel Drew, understood naked short selling was bad (as he lost his fortune covering a short squeeze) when he said, “He who sells what isn’t his’n, Must buy it back or go to prison.” Too bad Cox never took economic history in school (or googled economic trivia).
5.

Failure to protect small investors.

It is no coincidence that according to the FT, stock ownership by individual investors is at an all-time low. The average individual investor knows that his chances in the market aren’t good. And the SEC doesn’t seem to care if the average guy is disenfranchised from the economic future of America. In addition to the above failures, Cox forgot that it was his job to make sure that brokers shouldn’t engage in deceptive sales practices (like in the sale of auction rate securities and the sale of Freddie and Fannie common and preferred stock to small investors because they were “guaranteed” by the government). Cox refuses to support private litigation by individual investors who were ripped off in the stock and bond market. If the SEC doesn’t protect the little guy, who will?

It is hard to think of how anyone could have done a worse job than Chris Cox (other than engaging in illegal conduct). But if anyone can think of things that I have missed, please feel free to tell everyone reading this by commenting. I doubt that my list is complete.

Fixed Annuities

Immediate Annuity - AIG Insurance

2008-09-19T13:18:00.001-07:00

AIG collapse would have cost N.C. $1B - Charlotte Business Journal:
If the federal government had allowed insurance colossus American International Group Inc. and its subsidiaries to fail, N.C. regulators — and ultimately state taxpayers — would have been left with a mess that would have cost, according to a conservative estimate, more than $1 billion to clean up.

That’s the back-of-the-envelope number that officials at the Raleigh-based N.C. Insurance Guaranty Association came up with as they monitored this week’s developments on Wall Street, including the $85 billion federal loan guarantee that’s supposed to save AIG.

“We wanted to see what our exposure would be,” says Mike Newton, the association’s guaranty director. “And the more we looked at it, the wider our eyes got.”

The federal government now controls almost 80 percent of AIG.

Insurance companies, large and small, don’t file for bankruptcy in the way most businesses do. When they topple, they go into a liquidation process in which regulators try to make sure policyholders are protected ahead of other creditors.

On the state level, industry groups such as NCIGA enter the picture to ensure all outstanding policy claims are paid — on auto crashes, for example — and to refund customers any premium dollars paid for coverage that won’t be coming.

The industry groups get the funds to do that by passing the hat among the other insurance companies doing business in the state. In North Carolina, contributions come from 700 firms that, in 2007, had $6.5 billion in premiums in force. Any cleanup money those firms pay can then be deducted from their N.C. tax bills, which means the taxpayer ultimately picks up the tab.

As news of AIG’s chances of survival went from bad to worse, Newton searched the records of the 13 AIG property and casualty companies writing business in North Carolina. Those firms include American Home Assurance, National Union Fire and Granite State Insurance.

Outstanding claims and refundable premiums — the tab NCIGA would be held liable for refunding in case of a collapse — totaled $785 million. Of that total, $359 million was in the workers’ compensation arena, $43.6 million in auto insurance and $383.4 million in “all other categories, including fire, marine and similar types of policies.”

“These numbers we were looking at were just huge,” says Newton.

And that was just in North Carolina.

“Obviously, these numbers are the reason why the feds had to move,” says state Rep. John Blust of Greensboro, a member of the House Insurance Committee.

An AIG failure would have dwarfed the cost of any previous insurance collapse in the state. The most costly to date came after the demise of workers’ comp writer Reliance Insurance. That tab was $80 million.

In an AIG meltdown, the cost of a North Carolina cleanup would have gone even higher than Newton’s initial estimate, to perhaps $1 billion or more.

That’s because seven AIG subsidiaries also write life and health policies and various annuity plans in North Carolina. On the annuity front alone, AIG’s Sun America, at the beginning of 2007, was the state’s third-largest annuity writer at $331 million, giving it a market share of nearly 6 percent. Another subsidiary, AIG Annuity Insurance, had $46 million on its books, for a market share of nearly 1 percent.

The total North Carolina market is about $6 billion. The figures were complied by the state Department of Insurance.

If AIG’s subsidiaries firms had been caught up in the failure of their holding company, a second state group, the North Carolina Life & Health Insurance Guaranty Association, would have activated a procedure to pay consumer refunds of up to $300,000 per policyholder for claims and premium refunds.

That agency’s head, Lowell Miller, declines to put a figure on the possible cleanup costs. “But it would have been pretty significant,” he says. “The life and health numbers are big, and they generally are long-term contracts.”

Kristin Milam, a spokeswoman for the N.C. Department of Insurance, says the department routinely monitors the economic health of all the firms doing business in the state, including those under the AIG umbrella.

She notes it was the AIG holding company, not the insurance subsidiaries, that was in crisis. And Newton says all the AIG firms doing business in the state are well-capitalized and “doing fine.”

But because of the turmoil on Wall Street, he says it’s impossible to say for certain if the damage would have been limited to the holding company if AIG had gone under.

Annuity

Regulatory Safeguards Offer ‘Insurance Policy’ in Times of Crisis

2008-09-18T08:24:00.001-07:00

Insurance Consumers Protected by Solvency Standards (NAIC)
FOR IMMEDIATE RELEASE

INSURANCE CONSUMERS PROTECTED BY SOLVENCY STANDARDS
Regulatory Safeguards Offer ‘Insurance Policy’ in Times of Crisis

KANSAS CITY, Mo. (Sept. 16, 2008) — National Association of Insurance Commissioners (NAIC) President and Kansas Insurance Commissioner Sandy Praeger today issued the following statement in response to the financial issues facing American International Group (AIG):

“We have a very strong message for consumers: If you have a policy with an AIG insurance company, they are solvent and have the capability to pay claims. Our job is to ensure that they continue to have the ability to pay.

“In this particular instance, AIG’s insurance subsidiaries are being asked to provide liquid assets to the financially distressed non-insurance parent company in exchange for non-liquid assets. The New York State and Pennsylvania Insurance Departments are working with AIG to review the transaction. State insurance regulators will only approve this type of action if they are assured it is part of a total resolution of the liquidity issue at the parent company and fairly compensates its insurance company subsidiaries.

“As a holding company, AIG is a separate, federally regulated legal entity that is distinct and apart from its subsidiary insurers. The subsidiary insurers are governed by state laws designed to protect the interest of policyholders. State insurance regulators are committed to protecting the interest of policyholders and will work closely with AIG management and other regulators to fulfill this commitment.

“The No. 1 job of state insurance regulators is to make sure insurance companies operate on a financially sound basis. If needed, we immediately step in if it appears that an insurer will be unable to fulfill the promises made to its policyholders. This includes taking over the management of an insurer through a conservation or rehabilitation order, the goal being to get the insurer back into a strong solvency position.

“State regulators have numerous actions they can take to prevent an insurer from failing. Claims from individual policyholders are given the utmost priority over other creditors in these matters — and, in the unlikely event that assets are not enough to cover these claims, there is still another safety net in place to protect consumers: the state guaranty funds. These funds are in place in all states. If an insurance company becomes unable to pay claims, the guaranty fund will provide coverage, subject to certain limits.

“It is a state insurance regulator’s responsibility to protect policyholders and ensure a healthy, competitive market for insurance products. Strict solvency standards and keen financial oversight — based on conservative investment and accounting rules — continue to be the bedrock of state-based insurance regulation.”

About the NAIC

Headquartered in Kansas City, Mo., the National Association of Insurance Commissioners (NAIC) is a voluntary organization of the chief insurance regulatory officials of the 50 states, the District of Columbia and five U.S. territories. The NAIC’s overriding objective is to assist state insurance regulators in protecting consumers and helping maintain the financial stability of the insurance industry by offering financial, actuarial, legal, computer, research, market conduct and economic expertise. Formed in 1871, the NAIC is the oldest association of state officials. For more than 135 years, state-based insurance supervision has served the needs of consumers, industry and the business of insurance at-large by ensuring hands-on, frontline protection for consumers, while providing insurers the uniform platforms and coordinated systems they need to compete effectively in an ever-changing marketplace. For more information, visit www.naic.org/press_home.htm.

Annuity

INSURANCE CONSUMERS PROTECTED BY SOLVENCY STANDARDS

2008-09-18T08:22:00.001-07:00

Insurance Consumers Protected by Solvency Standards (NAIC)
FOR IMMEDIATE RELEASE

INSURANCE CONSUMERS PROTECTED BY SOLVENCY STANDARDS
Regulatory Safeguards Offer ‘Insurance Policy’ in Times of Crisis

KANSAS CITY, Mo. (Sept. 16, 2008) — National Association of Insurance Commissioners (NAIC) President and Kansas Insurance Commissioner Sandy Praeger today issued the following statement in response to the financial issues facing American International Group (AIG):

“We have a very strong message for consumers: If you have a policy with an AIG insurance company, they are solvent and have the capability to pay claims. Our job is to ensure that they continue to have the ability to pay.

“In this particular instance, AIG’s insurance subsidiaries are being asked to provide liquid assets to the financially distressed non-insurance parent company in exchange for non-liquid assets. The New York State and Pennsylvania Insurance Departments are working with AIG to review the transaction. State insurance regulators will only approve this type of action if they are assured it is part of a total resolution of the liquidity issue at the parent company and fairly compensates its insurance company subsidiaries.

“As a holding company, AIG is a separate, federally regulated legal entity that is distinct and apart from its subsidiary insurers. The subsidiary insurers are governed by state laws designed to protect the interest of policyholders. State insurance regulators are committed to protecting the interest of policyholders and will work closely with AIG management and other regulators to fulfill this commitment.

“The No. 1 job of state insurance regulators is to make sure insurance companies operate on a financially sound basis. If needed, we immediately step in if it appears that an insurer will be unable to fulfill the promises made to its policyholders. This includes taking over the management of an insurer through a conservation or rehabilitation order, the goal being to get the insurer back into a strong solvency position.

“State regulators have numerous actions they can take to prevent an insurer from failing. Claims from individual policyholders are given the utmost priority over other creditors in these matters — and, in the unlikely event that assets are not enough to cover these claims, there is still another safety net in place to protect consumers: the state guaranty funds. These funds are in place in all states. If an insurance company becomes unable to pay claims, the guaranty fund will provide coverage, subject to certain limits.

“It is a state insurance regulator’s responsibility to protect policyholders and ensure a healthy, competitive market for insurance products. Strict solvency standards and keen financial oversight — based on conservative investment and accounting rules — continue to be the bedrock of state-based insurance regulation.”

About the NAIC

Headquartered in Kansas City, Mo., the National Association of Insurance Commissioners (NAIC) is a voluntary organization of the chief insurance regulatory officials of the 50 states, the District of Columbia and five U.S. territories. The NAIC’s overriding objective is to assist state insurance regulators in protecting consumers and helping maintain the financial stability of the insurance industry by offering financial, actuarial, legal, computer, research, market conduct and economic expertise. Formed in 1871, the NAIC is the oldest association of state officials. For more than 135 years, state-based insurance supervision has served the needs of consumers, industry and the business of insurance at-large by ensuring hands-on, frontline protection for consumers, while providing insurers the uniform platforms and coordinated systems they need to compete effectively in an ever-changing marketplace. For more information, visit www.naic.org/press_home.htm.

Annuity

Indexed Annuities - Protest Rages over EIA Proposal

2008-08-26T10:00:00.001-07:00

Protest Rages over EIA Proposal
By Edward Hayes
August 18, 2008

The Comment period on the SEC’s rule proposal to regulate equity-indexed annuities (EIAs) as securities still has three weeks left. But some industry groups have come out to criticize the measure, with one of the biggest annuity trade groups still looking into it.

Last month, the SEC proposed treating EIAs, which individual states now regulate, as securities and to place them fall the jurisdiction of SROs like FINRA. Equity indexed annuities are investments that earn their returns from a stock index that the insurance firm invests in.

While regulators consider variable annuities to be securities products, EIAs have never been as clear-cut.

Until the proposal, there was no definitive guidance for firms as to whether or not EIAs were securities. The rule proposal specifically states that EIAs are securities offerings and must be sold by a broker-dealer certified to sell securities.

Some proponents of the rule change say the rule proposal was necessary because securities regulators focus on investor protection, while insurance regulators are primarily concerned that the insurance companies they oversee don’t become insolvent.

But the National Association for Fixed Annuities (NAFA) disagrees. It claims that state insurance regulators are equally concerned about investors.

“State insurance departments have very robust departments that deal with consumer complaints and sales tactics,” said James Jorden, an outside council with NAFA. “For years, they have been responding to issues of that sort.”

NAFA publically expressed its reservations about the proposal, although it has not yet submitted a letter to the SEC. Meanwhile NAVA, a major VA trade group, is still quiet about the measure. Both groups requested an additional 90 days to confer with their members.

Even though NAFA has not submitted its opinion yet, its representatives, as well as other groups have already laid out some initial concerns. Opponents of the proposal believe that the states the proper regulators to handle the offerings, and claim that state insurance regulators have been beefing up regulations concerning EIAs and seniors.

Some of the state insurance regulators’ measures include closer scrutiny on sales of EIAs and other fixed annuity offerings. Also some states have passed rules that require firms check the the suitability of EIA sales. At the same time, insurance companies have worked to improve the training of the sales staff and have given their own policies and procedures a closer look regarding the products.

Other commenters on the proposal have shown the more emotional side of the EIA regulatory issue.

“The securities industry is living in glass houses, and throwing stones at an industry that has protected the lives, property, and nest eggs of people for a long, long time,” said Steven Delaney, a member of American Annuity Advocates.com, said in his letter to the SEC. “It’s all ridiculous, again, greed, imperialism on the part of the Rulers of the Universe, FINRA.”

The proposal is part of the SEC and FINRA’s effort to combat unsuitable sales to seniors. After looking into “free lunch” seminars, the two have begun filing cases and proposing new rules and regulations. The rule proposal on the EIAs is the latest in that effort.

The problem is, while the regulators believe those offerings pose a threat to seniors, those who deal with EIAs on a regular basis aren’t convinced that is the case.

“Through state regulations, there are very robust standards applied to every sale,” Jorden said. “The vast majority of these sales are suitable.”

He went on to argue that the number of complaints about those specific offerings is less than 1% at each insurance company. Others argued that while there are unsuitable sales made with EIAs, it is a common fact found associated with all finance services offerings.

Some provisions that make EIAs a low-risk investment are the fact that they must guarantee a return on the buyer’s principal and rate of return, Jorden said. In other words, if a buyer invests $100 at 10% interest, so long as they remain in the offering for the required amount of time, they will have the same money when they pull out at the same interest rate.

NAFA also contends that Congress and the SEC have already established that EIAs can’t be securities. First, the ’33 Act lists “insurance or endowment policy or annuity contract or optional annuity contract[s]” as exempt from being classified as securities. And Rule 151, which became effective in 1986, establishes a safe harbor for fixed annuities from securities regulations, according to Jorden.

“Congress decided years ago [fixed annuities] should not be regulated under securities regulations and the courts have validated them,” Jorden said.

He also referenced the 2002 Malone v. Addison Marketing Insurance case, where a United States District Court ruled that the definition of a security does not include fixed annuities.

As it stands now, comments on the rule proposal will close on Sept. 10, but if the Commission wishes to extended the period it would most likely do so when the current comment period ends.

Have a comment? Let us know what you think of this or another CCH Wall Street story by clicking here.

Index Annuity Guide

Index Annuity - Why is NAFA opposed to the proposed Rule 151A?

2008-08-22T19:54:00.001-07:00

NAFA NEWS
RE: August 16th Article by Tom Lauricella, Wall Street Journal. On August 18th, the Wall Street Journal columnist, Tom Lauricella interviewed NAFA Government Relations Chair, Danette Kennedy. Unfortunately, most of the information did not make it into the article, but NAFA wanted its members to have excerpts from the interview.

WSJ: Why is NAFA opposed to the proposed Rule 151A? What’s the big deal?

NAFA: The big deal is that NAFA believes the state insurance departments and insurance companies do a better job of ensuring suitable and appropriate sales than any federal entity. The states provide consumers with local access to department employees who can help them with their complaint, more timely and efficient processing of their complaints, and they avoid the often lengthy and costly arbitration process through the SEC.

WSJ: How are the states better at investigating complaints?

NAFA: The SEC has acknowledged that the current arbitration process isn’t working. They even put out a release saying so and that they needed to review the current process as there were many complaints that the process was time consuming, convoluted, and expensive. Also, the state insurance departments are also the final determination of insurance company licensing, product approval and marketing and they hold quite a big stick over the carriers when it comes to market conduct and complaints.

WSJ: One of the things that we see as beneficial to federal regulation is that there is one source for product comparisons and information.

NAFA: What source is that?

WSJ: Edgar

NAFA: We are not familiar with the source, but would be happy to look into it and send you follow up information. However, the securities industry has never argued that the taking over control of insurance products was predicated on a need for a central place of information. Also, while we are unfamiliar with EDGAR, we are very familiar with a variety of sources where you can find company and product information. For example www.annuityspecs.com; www.annuityratewatch.com; www.ipipeline.com to name a few.

WSJ: Can you tell us how earning excess interest is NOT a security.

NAFA: Excess interest has never been the test for defining a security or an insurance product. An annuity that provides a guaranteed interest rate that is promised the first year is a declared-rate annuity, one that is promised for a select number of years is multi-year guarantee annuity or a MYGA, one that is promised to provide a specified income stream is an immediate and one that is promised based in part on the positive changes of an outside index is an index annuities. Also, excess interest is the cash value basis for all universal life and whole life insurance products.

WSJ: But doesn’t the fact that the index product’s interest isn’t certain or known in advance makes it a risk to the customer and a security, right?

NAFA: Wrong. You can’t re-define risk. The law has already defined risk. Risk is assumed by the individual if, because of market fluctuations, some or all of their money could be lost. The fixed insurance product, including the indexed annuity, promises that if the market goes down, you will never lose your principal or your previous interest. That promise means the assumption of risk (risk of the consequences of negative market returns) is born by the insurance company.

WSJ: You’re talking about the minimum interest guarantee right? How often is the minimum guarantee paid out versus the excess interest?

NAFA: We do not have those figures but in reality they are really irrelevant. The minimum guarantee is simply the promise that even if the market performance IS negative, the customer is assured that they will at least earn a minimum interest and if you keep saving with the tax-deferred annuity you will always have the floor protection and the potential for positive interest, but at the very least – minimum interest.

WSJ: A variable annuity has a fixed interest bucket. Why doesn’t that make it an insurance product and not a security?

NAFA: Because it doesn’t have the minimum interest guarantee on the variable account or the protection from negative market activity. The investment element of the potential for gain during positive markets and the potential for loss during negative markets is what makes it a security.

Follow up question regarding EDGAR: A review of the EDGAR website and fixed annuity websites (including index product information) shows that the information is available for annuities and searching by product features, company or any other criteria is available. NAFA would be more than willing to take Mr. Lauricella through a tour to demonstrate.

EDGAR*

Annuity Rate Sites

Detailed Company Information

X

X

Analytical models and tools including in-depth searching

X

X

Product Database

X (SEC Filings)

X( State Product Approvals)

*EDGAR® is a federally registered trademark of the U.S. Securities and Exchange Commission (SEC). EDGAR Online is not affiliated with or approved by the U.S. Securities and Exchange Commission.

Bottom of Form

Follow up Question regarding Commissions

A common misperception is that fixed index annuities pay higher-than-usual commissions. Commissions payable on IAs today are as low as 1% and the average on all IA products is 6.91%. More importantly, the indexed annuity commission received by the agent averaged 7.81% of premium during the same period. With only 90 basis points difference between the commissions available and the commissions paid, the common assumption that “high commissions” are used as inducement to sell very elderly people unsuitable annuities is repudiated. Furthermore, over 98% of all fixed annuity products reduce commissions by 50% or more with some paying 0% at older ages (typically age 75 and above). This is very dissimilar to mutual funds or other market risk products that do not waive surrender charges or guarantee certain minimum positive returns in the event of death, nursing home confinement, terminal illness, RMDs, creation of a lifetime stream of income, etc. I am unaware of any other financial instrument that reduces surrender charges (or contingent deferred sales charges) due to age.

Furthermore, the average commission that was paid to agents is well below asset fees paid out year after year. And, unlike asset fees, annuity commissions are not taken out of the purchaser’s premium, but rather are paid directly to the producer by the carrier. A no-surrender charge product with a typical 1% annual asset fee as opposed to say a 7-year surrender charge product with a 6% commission will actually have a higher cost to the client and will thus reduce the potential return to the client, not increase it. An asset based trail must recover an increasing cost over time from the spreads and since the spreads cannot be increased (in most cases), they start out higher at the outset than spreads on products with traditional stacked front end commissions and contingent deferred sales charges. Just as a typical “A” share mutual fund will actually cost a client less if the asset is held for a longer duration than a “B” share mutual fund will, so will a stacked front end commission on the annuity cost less than the asset based trail over the same duration.

Data Source: Advantage Group Associates, Inc., Sheryl Moore, President

Annuity Definition

Index Annuities - National Association of Insurance and Financial Advisors

2008-08-22T19:31:00.001-07:00

The Board of Trustees of the National Association of Insurance and Financial Advisors (NAIFA) today voted to accept the recommendation of the NAIFA Policy Formation Subcommittee and oppose the Securities and Exchange Commission (SEC)s proposed Rule 151A, which would classify certain indexed annuities as securities. Indexed annuity products have traditionally been viewed as insurance products under the supervision of state insurance regulators. If the SEC proposal is finalized, the SEC and the Financial Industry Regulatory Authority (FINRA) would have regulatory authority over indexed annuity sales.

In our view, these [indexed annuity] products do not meet the test for determining whether a product is a security, commented NAIFA President Jeffrey J. Taggart, CLU, ChFC, LUTCF. Unlike the case with investment products such as mutual funds and individual stocks, with an indexed annuity the investment risk of a downturn in the related index rests with the issuer of the product, not the consumer.

On June 25, 2008, the SEC issued the new proposed rule, which would classify certain indexed annuities as securities. The proposal would accomplish this by creating a new Rule 151A changing the treatment of indexed annuities under the insurance products exemption found in the Securities Act of 1933. If the proposed rule is adopted, the SEC and FINRA would have jurisdiction over indexed annuity sales.

NAIFA believes that the current state regulatory structure is the appropriate means for addressing the concerns raised by the SEC, and NAIFA is committed to working with the National Association of Insurance Commissioners (NAIC) and state insurance departments towards the goal of having every state adopt and vigorously enforce the NAICs model regulations on annuity suitability and disclosure. NAIFA also recommends that a state regulatory body develop standards for indexed annuity product design that would be implemented by state insurance regulators and used to prevent inappropriate indexed annuity products from being marketed.

To learn more about this and other insurance regulatory reform issues, visit www.naifa.org or contact NAIFAs Government Relations department at 877-866-2432.

Print this Press Release: NAIFA Board Votes to Oppose SEC Proposal on Indexed Annuities

About NAIFA: Founded in 1890 as the National Association of Life Underwriters, the National Association of Insurance and Financial Advisors comprises nearly 800 state and local associations representing the business interests of 60,000 members nationwide. Members focus their practices on one or more of the following: life insurance and annuities, health insurance and employee benefits, multiline, and financial advising and investments. NAIFAs mission is to advocate for a positive legislative and regulatory environment, enhance business and professional skills, and promote the ethical conduct of its members. Visit NAIFAs website at www.naifa.org.

Annuity

Immediate annuities

2008-07-13T12:28:00.001-07:00

Immediate annuity in retiree’s portfolio increases amount heirs receive
By HUMBERTO CRUZ
Tribune Media Services

Do you want to spend the most you can in retirement? Or would you rather pass something on to your kids?

Maybe you can do both.

One way, according to the actuarial firm Milliman Inc. in Seattle, is to include an immediate fixed income annuity in your retirement portfolio. Although the finding is counterintuitive, including the annuity increases the amount retirees can pass on to our heirs on average, compared with putting all their money in a portfolio of mutual funds, a study by Milliman indicates.

An immediate annuity is an insurance product that, in return for a lump-sum premium, guarantees an income for life. Many studies have shown that income annuities on average provide higher lifetime income than we can get on our own from high-quality fixed-income investments.

But with income annuities, we give up or at least seriously limit access to our principal. Unless we opt for “period certain” or minimum guaranteed payments, our heirs get nothing when we die. Many people shy away from immediate annuities because they don’t want to disinherit their children.

So, how can including an immediate annuity in a retiree’s portfolio actually increase the amount heirs receive?

“It was a bit surprising, but the annuity provided a higher bequest on average because the mutual funds are largely left untapped in the early years,” said Tim Hill, a Milliman consulting actuary and principal. As a result, the mutual funds can grow to bigger amounts on average than if retirees make regular withdrawals to generate income.

The Milliman study was commissioned by NAVA, formerly the National Association for Variable Annuities and now the Association for Insured Retirement Solutions. NAVA’s membership includes insurance companies that sell annuities.

Study findings depend heavily on assumptions. In one case study, a 65-year-old couple with $500,000 in savings sought $20,000 in annual income, increasing by 2.5 percent a year for inflation, to supplement Social Security benefits. They could get an immediate annuity paying $6,739 a year for every $100,000 of premium until the second spouse died, assumed to happen on average in 31 years.

Under those assumptions, the best way to satisfy income and bequest goals was to use $300,000 to buy an immediate annuity that paid $20,200-plus a year for life and to split the other $200,000 in a 60-40 stock-bond fund mix.

Under other scenarios and investing more aggressively, the couple could have increased the bequest to as much as $1,338,000 with an annuity, compared with $945,000 without one.

Of course, if the couple died right after spending $300,000 for this annuity with no “period certain” payments, the heirs would receive just the $200,000 in the mutual funds. If there is any “rule of thumb” I derive from this study, it is to have enough sources of predictable income — whether from annuities or other sources — to cover expenses at least the first few years in retirement, without having to depend on uncertain investment returns

Annuity

Index Annuity - Regulation isn’t a cure-all

2008-07-13T12:19:00.001-07:00

YOUR MONEY: Regulation isn’t a cure-all / QCTimes.com
By Chuck Jaffe

Regulation doesn’t stop people from making lousy investment choices.

You can improve disclosures, enhance transparency, increase the height of the bar an issuer has to climb over to get to the public, and give greater consumer protection, but people will still make choices that are less than ideal for their financial future.

So when the Securities and Exchange Commission announced a rules proposal to regulate equity-indexed annuities, an insurance-based product that has been growing both in popularity and problems in recent years, consumer activists were pleased, insurance companies were angered and investors should have come away with another warning to live by the code of “Buyer beware.”

An equity-indexed annuity, or EIA, is a contract between a buyer and an insurer that gives the investor a certain amount of money at a pre-determined time. The key with an EIA, however, is that it has certain provisions that allow buyers to participate in some of the upward moves of a stock market index and, typically, to avoid any negative performance delivered by the same index.

That has made it wildly popular recently, offering protection against the nerve-wracking downward twists of the market while enhancing returns at times when volatility pushes the market up.

Because the annuities offer a fixed minimum rate of return guaranteed by the insurer, they have been treated like an insurance product, rather than a security. Variable annuities, by comparison, are regulated like investments expressly because of the variability of returns.

Equity-indexed annuities can have similar variance — being tied to a market index, they have a risk component that arguably makes them more investment than insurance — so critics have suggested they be regulated like investments. Not surprisingly, the insurance industry is opposed to this idea.

The insurance industry began springing EIAs on the public in the mid-1990s, and they really took off once investors lived through the end of the Internet bubble and the ensuing bear market. According to SEC estimates, sales of equity-indexed annuities reached $25 billion in 2007, and more than $120 billion total is invested in these products.

Equity-indexed annuities have been in the news lately because of several proposals — both in Congress and in the regulatory world — to protect senior citizens. EIAs are frequently pitched to seniors, often through “free lunch” seminars where an investor is sold a complex product they barely understand — frequently without complete awareness of long maturity periods and severe early withdrawal penalties — that is clearly the right move only for a small segment of the population.

Ironically, many financial advisers believe equity-indexed annuities are best used by the people who never get a pitch for them. For an older person of modest means — looking for some market participation, but also potentially in need of the money in an emergency — EIAs are a common sales pitch and, all too often, a bad choice. For someone who is young and rich, they can be a pretty good tax-deferred investment option.

Industry supporters acknowledge that the business is likely to become less profitable because any federal law would probably force insurers to clearly tell buyers how much they charge for the product, a disclosure which isn’t required now.

Commissions on EIAs are currently regulated by state insurance commissioners and they tend to average around 8 percent, compared to commissions on variable annuities — already overseen by the SEC — where the typical sales charge is closer to 5.5 percent.

If nothing else, putting securities regulators on EIAs will drive down commissions, which is good for consumers. It also will increase the licensing requirements on the sellers — currently, agents selling EIAs do not need a securities license — and the career-ending threat of a lost license is enough to keep most securities dealers on the straight and narrow.

“If this proposal becomes law, it’s a much stronger deterrent against misconduct,” says Karen Tyler, the securities administrator for North Dakota and the president of the North American Securities Administrators Association. “We’re constantly seeing new investment products created, and this should help manage the evolution of many products to the advantage of the consumer.“

In truth, regulation won’t prevent people from buying investments that may not be well-suited for them.

“It’s not going to stop the sale of these things — these are sold by high-pressure salesmen who know what they are doing and who know what appeals to the market, and regulation really isn’t going to change the sales pitch much — but increased transparency and information is a good thing,” says David Schiff of Schiff’s Insurance Observer, an industry newsletter. “Let’s face it, these things sound really good, especially to nervous investors. That’s not going to change.”

One other key consideration is the way that many traditional investment products are morphing toward the annuity, promising certain payouts or giving certain guarantees against market declines and the alike. For a consumer and/or an adviser looking through myriad new options and trying to come up with an optimal solution for their money, having a level regulatory playing field will make comparison-shopping a whole lot easier.

That’s the plus no one is discussing, but clearly having all investments examined on the same kind of platform is far superior to having competing products looked at under different microscopes.

That said, none of it will save the foolhardy consumer from buying a bad product, or simply purchasing something where they don’t know the rules and requirements.

“Regulation doesn’t protect people from making stupid investments,” Schiff says. “It doesn’t change the fact that before you buy anything, you need to know if it’s right for you, and if you can’t determine that — or can’t get all of your questions answered to your satisfaction — you shouldn’t buy it, no matter what it is.”

Chuck Jaffe is senior columnist for MarketWatch and host of Your Money Radio (yourmoneyradio.com). He can be contacted at cjaffe@marketwatch.com or at Box 70, Cohasset, MA 02025-0070

Annuities

Variable Annuities - Boom Fades for Variable Annuities

2008-07-13T12:12:00.001-07:00

Boom Fades for Variable Annuities - ANNUITIES - Los Angeles Times - calendarlive.com.

By LIZ PULLIAM WESTON, Times Staff Writer

For nearly a decade, variable annuities have been one of the hottest retirement savings products around--both in terms of sales and controversy.

The controversy shows no sign of abating. But sales of variable annuities are plummeting as falling stock markets, increased attention from regulators and a flood of lawsuits by disgruntled annuity owners take their toll.

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That's bad news for insurers that had pinned high hopes for profit on ever-growing sales of the popular retirement savings vehicles, which soared from near obscurity a decade ago to almost $1 trillion in assets last year. Others cheer the trend. For many financial planners and unhappy investors, the fewer Americans who own variable annuities, the better.

"I detest them," said Laura Tarbox, a Newport Beach financial planner who thinks variable annuities are suitable only for certain wealthy individuals.

"People are really not told the whole story, and once they realize what they've got they say, 'Oh, my gosh, I want out!' "

Don and Julie Propp of Irvine wish they hadn't purchased variable annuities for their individual retirement accounts four years ago. The Propps say they were misled about the nature and the cost of the annuities.

"What makes me so angry is that it's really hard for us to get out of [the annuities] without paying a lot of money," said Julie Propp, 54, a government secretary.

Industry proponents defend variable annuities, saying they are an excellent way to save for retirement--offering investors flexibility, tax deferment and protection of their principal if investors die while the stock market is down.

"Variable annuities have features that no other investment has," said Tom Connor, general counsel for the National Assn. for Variable Annuities, a trade group.

A variable annuity is a combination of an insurance contract and an investment in which gains can grow tax-deferred. The insurance company selling the annuity guarantees that if the investor dies before withdrawing the money, his or her heirs will receive at least as much as the investor originally contributed--a feature known as a death benefit.

Meanwhile, investors can take advantage of stock market gains. They can allocate their annuity contributions among stocks, bonds or cash using so-called subaccounts that resemble mutual funds. And they can move their money between subaccounts without triggering income or capital gains taxes.

Variable annuities often cost more than comparable mutual funds, however, and usually have surrender charges that can make withdrawing money expensive.

Those disadvantages weren't much of a deterrent for most of the 1990s, as the stock market soared, baby boomers tucked away more money for retirement and investors found their stock market gains could be protected from taxes in a variable annuity.

Insurance companies discovered variable annuities were good for their bottom lines, as well. Los Angeles-based SunAmerica Inc., which sold its life insurance business to concentrate on annuities in the late 1980s, racked up big profits and saw its shares soar more than 11,000% in the 1990s, making it the best-performing stock on the New York Stock Exchange.

Other insurers quickly followed SunAmerica's lead, and assets of variable annuities exploded from less than $176 billion in 1991 to a record $973 billion last year, according to the VARDS Report, which tracks industry trends.

Now the tide has turned.

As the stock market has fallen over the last 18 months, so have variable annuity sales. Since peaking in early 2000, the amount of money contributed to variable annuities in the first six months of 2001 fell 21.2% to $57.7 billion, according to LIMRA International, an insurance industry research firm.

The fall is cutting into insurance company profits. On Aug. 7, financial services company Conseco Inc. cut its earnings forecast by more than 10%, blaming the weak stock market's effect on variable annuity sales, while an analyst downgraded John Hancock Financial Services Inc. on similar concerns. Skandia, a Swedish insurance firm, reported that its second-quarter sales of variable annuities in the U.S. fell 56%, to $2.5 billion.

Investors Suing Insurers Over Annuity Sales

Meanwhile, companies are battling in court and with regulators over annuities sold during the boom times.

Consumer advocates and many financial planners had long complained they were seeing variable annuities sold to people who did not understand or who could not benefit from their features.

Variable annuities' costs and complexity make them best suited for long-term investors, but some products were sold to people with short-term financial needs or to elderly people unlikely to live long enough for the tax benefit to outweigh the extra costs.

Other buyers didn't even realize they were purchasing variable annuities.

The Propps of Irvine said they thought they were buying mutual funds when they purchased two variable annuities from SunAmerica in 1997 for their IRAs.

Don Propp, a disabled 50-year-old engineer, said their financial advisor falsely told them their accounts couldn't lose money. The Propps say they weren't toldthey were paying extra for a feature--tax deferment--that they couldn't use because IRAs already are tax advantaged.

SunAmerica officials declined to comment.

The Propps are among legions of investors who have sued insurance companies over the sale of variable annuities in retirement plans.

Last year, American Express Financial Corp. paid $215 million to settle three lawsuits involving the sale of annuities and other insurance products to more than 2 million investors. Lawsuits are pending against SunAmerica, Nationwide Financial Services Inc., American United Life Insurance Co. and VALIC (Variable Annuity Life Insurance Company), a subsidiary of American General Financial Group.

The companies are fighting the lawsuits, saying annuities are an appropriate investment for retirement plans because of the protection offered by the death benefit.

The controversy has prompted regulators to step up their investigations of variable annuity sales.

The National Assn. of Securities Dealers launched a probe of annuities sales two years ago "after many years of benign neglect" of the industry, Andrew A. Favret, regional chief counsel for the NASD's New Orleans office, told a variable annuity industry conference in late June.

What regulators found is that many companies hyped variable annuities' advantages without discussing their possible disadvantages--or making it clear that annuities are an insurance product. Some companies had procedures in place to identify and prevent unsuitable sales, but others did not.

In February 2001, the NASD announced settlements with an agent and four companies--Prudential Securities Inc., First Union Brokerage Services Inc., Allmerica Investments Inc. and Lutheran Brotherhood Securities Corp.--for improperly marketing and selling variable annuities.

The fines involved were minimal--$10,000 to $32,500 per case--but the actions put companies on notice that regulators were watching, Favret said.

Another wave of enforcement actions is expected in the fall, he said, with more to follow.

The NASD is paying especially close attention to how companies promote variable annuities in tax-deferred retirement plans.

"We're nowhere near taking a position that it's per se unsuitable," Favret said. "We are concerned about the routine selling [of variable annuities in retirement plans]. . . . We'd expect some degree of disclosure that it could be redundant in a qualified plan."

Last Year SEC Issued an Investor Alert

The Securities and Exchange Commission took a stronger position. The SEC issued an "investor alert" in June 2000 warning that variable annuities' costs may outweigh their benefits.

The SEC said most investors should avoid purchasing a variable annuity for an IRA, 401(k) or other tax-qualified retirement plan, and instead make the maximum contributions to those plans before considering an annuity.

But retirement contributions are big business for the annuity industry. More than half the money contributed to variable and fixed annuities in 1999 went into retirement plans. Of the $163.5 billion in contributions that year, $50.7 billion went to IRAs and $32.9 billion to 401(k)s and other employer-sponsored retirement plans.

Insurers say the increased regulatory scrutiny, and the sales declines, are temporary setbacks. Americans' need for retirement savings will continue to feed variable annuity sales, said Connor of the National Assn. for Variable Annuities.

Regulatory scrutiny has helped responsible insurers review and improve many of their sales practices, he said.

American Express, for example, has greatly increased the legal disclosures given to each customer before a variable annuity purchase, said Paul Bruce, the company's vice president for market conduct practices. The company also is improving its internal controls and reviews to catch unsuitable sales, he said.

The NASD's Favret agrees that insurers seem to be taking the regulatory issues seriously.

"Our sense is a very positive response from the industry as a whole," Favret said. "They want to fix the industry as much as we do."

AnnuityDefinition.com

How to save some for now and some for later

2008-07-07T06:39:00.001-07:00

How to save some for now and some for later -- chicagotribune.com
Do you want to spend the most you can in retirement? Or would you rather pass something on to your children?

Maybe you can do both.

One way, according to the actuarial firm Milliman Inc. in Seattle, is to include an immediate fixed-income annuity in your retirement portfolio. Although the finding may seem counterintuitive, including the annuity increases the amount retirees can pass on to our heirs on average, compared with putting all their money in a portfolio of mutual funds, a study by Milliman indicates.

An immediate annuity is an insurance product that, in return for a lump-sum premium, promises an income for life. Many studies have shown that income annuities on average provide higher lifetime income than we can obtain on our own from high-quality fixed-income investments. In effect, the premiums from annuity buyers who die relatively young subsidize the lifetime payments received by those who live a long life.

But with income annuities, we give up or at least seriously limit access to our principal.

Unless we opt for "period certain" or minimum guaranteed payments, our heirs receive nothing. Many people shy away from immediate annuities because they don't want to disinherit their children.

So, how can including an immediate annuity in a retiree's portfolio actually increase the amount heirs receive?

"It was a bit surprising, but the annuity provided a higher bequest on average because the mutual funds are largely left untapped in the early years," said Tim Hill, a Milliman consulting actuary and principal. As a result, the mutual funds can grow to bigger amounts on average than if retirees make regular withdrawals to generate income.

The Milliman study was commissioned by NAVA, formerly the National Association for Variable Annuities, now known as the Association for Insured Retirement Solutions. NAVA's membership includes insurance companies that sell annuities. "Milliman does not intend the results to benefit any specific parties," the study stated. "In particular, Milliman is not recommending any particular insurance purchase."

Study findings depend heavily on assumptions. In one case study, a 65-year-old couple with $500,000 in savings sought $20,000 in annual income, increasing by 2.5 percent a year for inflation, to supplement Social Security benefits. They could obtain an immediate annuity paying $6,739 a year for every $100,000 of premium until the second spouse died, assumed to happen on average in 31 years, given today's longer lifespans.

Under those assumptions, the best way to satisfy income and bequest goals was to use $300,000 to buy an immediate annuity that paid more than $20,200 a year for life and to split the other $200,000 in a 60-40 stock-bond fund mix. The couple had a 93 percent probability of meeting their income goals while leaving an average bequest of $892,000.

Under other scenarios and investing more aggressively, the couple could have increased the bequest to as much as $1,338,000 with an annuity, compared to $945,000 without one.

Of course, if the couple died right after spending $300,000 for this annuity with no "period certain" payments, their heirs would receive just the $200,000 in the mutual funds.

If there is any "rule of thumb" I derive from this study, it is to have enough sources of predictable income—whether from annuities or other sources—to cover expenses during at least the first few years in retirement, without having to depend on uncertain investment returns.

"What people are concerned about right now is retiring in a down market," Hill said. With predictable income, they can give their investments time to grow, or recover if needed.

Humberto Cruz is a columnist for Tribune Media Services. E-mail him at yourmo ney@tribune.com.

Tune Out Bad Financial Advice for Summer Tune-Up: John F. Wasik

2008-07-07T06:38:00.001-07:00

Bloomberg.com: Opinion
(Bloomberg) -- Normally this is the time I recommend a midyear financial tune-up.

While saving more, paying down debt and investing in your retirement plan are my usual chestnuts, this year I'm advising that you start by tuning out bad advice.

This is surprisingly difficult when we are solicited with advertisements from computers, cell phones and supermarkets around the clock. And these messages are tough to resist once salesmen have us ensnared in their office or free seminar.

Sometimes knowing what to avoid is half the battle. The first deceptive lure is the free meal sponsored by an investment firm. I know it's a cliche that there is no free lunch, but many people fall prey to spider-and-fly setups to lure new clients.

Newspapers are loaded with ads for ``free'' pitch fests. Lately I have seen a lot of promotions for making a fortune through buying foreclosures. Almost all of them are at fancy hotels, restaurants or conference centers.

The North American Securities Administrators Association looked into these prospecting sessions and discovered that all of them were sales presentations, even though they were advertised as ``educational workshops'' in which ``nothing would be sold.''

Almost 60 percent of these events were ``poorly supervised, 50 percent featured exaggerated or misleading advertising claims, 23 percent involved possibly unsuitable recommendations and 13 percent appeared to be fraudulent.''

Wrong Adviser

Of course, there is nothing wrong in approaching a financial professional for advice.

Yet to get the kind of service that's in your best interest, you should be willing to pay for it. And you need to check credentials. Keep in mind that ``financial adviser/consultant'' and ``wealth manager'' are largely unregulated designations.

You would be better served to ask if they are fiduciaries. These professionals take full legal responsibility for their advice and can be sued if they are guilty of wrongdoing.

Most advisers are securities and insurance brokers who make you sign an industry-sponsored arbitration agreement. You forfeit your right to go to court in the event of a dispute.

Ideally, you should look for a state- and federally registered investment adviser and fee-only certified financial planner.

The latter professional charges only for his time, has at least three years of financial-planning training and experience and won't sell anything on commission. That's a good start because you won't have a salesman who needs to meet quotas.

Annuity Sales

You can find fee-only planners through the National Association of Personal Financial Advisors and certified planners through the Financial Planning Association.

Another overpowering pitch to tune out involves commissioned variable and equity-indexed annuities.

Most people don't need them because they tend to be overpriced, oversold and can perform poorly when you subtract all commissions and fees. Relentlessly hawked by a $1 trillion industry, they are retirement-income products with mutual funds inside them.

If you need an annuity, consider a low-cost, no-commission, fixed, immediate one. The best type isn't sold by salespeople and will guarantee a retirement income for life.

It's worth a look if you have a lump sum from a 401(k) plan or you want to supplement your retirement income.

Worst Pitch

You can buy no-commission annuities through Vanguard Group and T. Rowe Price, or through Napfa members, who have access to immediate fixed annuities at low institutional pricing.

Among the most awful pitches is something that's being touted as an employee benefit: the 401(k) debit card.

This allows you to treat your retirement fund as a cash account to withdraw money. Don't even think about it.

Debited withdrawals are treated as loans, subject to interest and fees and must be paid back within five years, warns the Financial Industry Regulatory Authority, the securities industry regulator.

What happens if you don't pay back these funds? Unlike a checking account-linked debit card, you will owe income taxes plus a 10 percent penalty if you are younger than 59 1/2.

The stinger is that you have to pay back your account with after-tax dollars within five years. Your initial contributions were free of income taxes, so there's a double and possibly quadruple penalty involved when you add taxes, interest and fees.

If anything, you should contribute fully to a 401(k)-type account, at least enough to get the employer match, if there is one. It nets you a 100 percent return on your initial investment.

Also consider starting a Roth 401(k) account, which is funded with after-tax dollars, although retirement withdrawals aren't subject to income tax.

Boosting basic savings is always a prudent pitch, although one you will rarely hear from a broker. To get that message, listen to your inner saver -- and tune out the noise.

(John F. Wasik, co-author of ``iMoney,'' is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: John F. Wasik in Chicago at jwasik@bloomberg.net.

The Risk of Annuities

2008-07-07T06:35:00.001-07:00

The Risk of Annuities - WSJ.com
By JANET PASKIN

Variable annuities are hot among baby boomers, thanks to new variations on the products that promise a steady stream of income regardless of how their underlying investments perform.

But some industry watchers and insiders fear that, in a bid to attract that boomer business, companies have made promises they can't afford to keep.

Guaranteed Income

Over the past decade, annual sales of variable annuities have more than doubled, to about $200 billion in 2007, according to NAVA, the industry's trade association. There are more than 1,100 different annuities on the market, up from 295 a decade ago.

A big reason for the recent growth is the fact that the industry has relaxed some of the old restrictions on its income-for-life promise.

The money used to purchase one of these new annuities gets invested in a handful of mutual funds picked by the customers. Whenever they choose, the investors can start receiving a minimum monthly payment for life. If the investments take off, the payments could grow higher. But they will never fall below a certain minimum.

And with the new products, investors can choose at any time to withdraw the money or pass it on to heirs. With traditional annuities, once investors start receiving payments, they can't get their initial investment back.

Too Much Risk?

In the eyes of some industry watchers, however, this is too generous a set of benefits. Critics wonder where the money to fund the payouts will come from if the underlying investments don't pan out.

Insurance traditionally works by gathering a large group together, so risk is spread around. Premiums from one customer can go toward the payout to another. But with the newer annuities, a falling market would presumably hurt all the customers at the same time, leaving the insurers' accounts short of funds to make payments.

This has already happened in one case, involving a British insurer that sharply reduced its payments to customers after the company's investing strategies failed.

Moshe Milevsky, a finance professor at York University in Toronto who has studied annuities for decades, says he likes the new products, but believes that even with their high fees, their prices don't cover the cost of protecting investors in a crash.

"These companies are going to have to think more carefully about risk," he says.

Credit-rating agencies are worried as well. Three years ago, credit analysts at Moody's raised red flags, writing in a report that "many companies have not done an effective job of quantifying risk" that the insurance companies were taking on in "plausible" worst-case scenarios.

Today, says Moody's analyst Scott Robinson, "we still have the same concerns."

Making Assumptions

Insurers point out that no U.S. company has ever defaulted on an annuity payment. They are aware, though, that they're in new territory.

Glenn Lammey, chief financial officer at Hartford Life, says that the new annuities simply don't have a long enough track record for companies to know what to expect.

"We make assumptions -- and that's the risk to us," Mr. Lammey says

Annuities can provide a reliable source of retirement income

2008-07-07T06:33:00.003-07:00

Annuities can provide a reliable source of retirement income | lansingstatejournal.com | Lansing State Journal
It was the height of the dot-com boom, when workers were retiring early on their double-digit tech-stock winnings and day trading was all the rage.
Advertisement

There stood Kelli Hueler, before an audience of financial professionals, explaining the urgent need for affordable annuities so future retirees won't run out of money.

"We were painfully ahead of our time," she said, chuckling as she recalled the day that dull, dependable, unfashionable annuities became her passion.

Since then, Hueler, who runs her six-person Hueler Associates out of an office park in Eden Prairie, Minn., has created a unique one-stop shop for retirees wanting to turn 401(k) assets into an income stream.

Think of Hueler's annuity marketplace, called Income Solutions, as the Travelocity or Orbitz of annuities. The Web site at www.incomesolutions.com is a place where 401(k) participants with access through their employee benefits can compare monthly payouts promised by various insurers and select the best.

Hueler and her team are setting out on a gargantuan task - to convince a generation of do-it-yourself investors who don't trust annuities to embrace them as a way to ensure they won't outlast their money. In recent years, annuities have only made headlines as unsuitable investments sold to the elderly.

But Hueler and other experts argue that good annuities are an idea whose time is now. With pension plans and Social Security benefits on the decline and retirees living longer with inadequate 401(k) balances, running out of retirement money is a top fear of the baby boom generation.

Jody Strakosch, MetLife's director for institutional income annuities, said the company doesn't typically compete against other insurers as it does through Income Solutions. But MetLife believes "income annuities are really, really critical for baby boomers."

In five years, Income Solutions has attracted 10 insurance companies, large retirement plan providers such as Hewitt Associates, Citigroup's Citistreet and T. Rowe Price, plus companies such as IBM and Boston University. As many as 250 retirement plans are either offering Hueler's comparison tool to employees or considering its adoption.

Currently, Income Solutions is available only to individuals whose employers or retirement-plan providers offer it, or clients of financial advisers that belong to the National Association of Personal Financial Advisers.

2008-07-07T06:24:00.001-07:00

New funds can provide payments in retirement | Dallas Morning News | News for Dallas, Texas | Personal Finance | Dallas Business News
By PAMELA YIP / The Dallas Morning News
pyip@dallasnews.com

If you've saved enough money to retire, congratulations. You're far ahead of many others.

Now your challenge is to make that money last.

Some consumers use annuities, which are contracts sold by insurance companies, and create an income stream at a later point in time, typically at retirement, to provide steady cash flow.

But there's a new kid in town called a managed-payout mutual fund, which is similar to annuities but definitely not the same.

These funds aim to provide regular income payments through a professionally managed, diversified portfolio.

Annuities can pay an income that can be guaranteed to last as long as you live. If you choose a "joint and survivor" feature, the annuity pays income as long as either you or your beneficiary lives.

"Payout funds are not guaranteed," said Steve Utkus, principal of the Vanguard Center for Retirement Research. "They're designed to help people who don't want to annuitize to come up with some type of financial structure to spend their money."

Payout funds also don't have the tax advantages that annuities do. In an annuity, your money grows tax-deferred as long as you leave it there.

But payout funds are taxed like any other mutual fund. That is, each time you take money from a mutual fund account, you're selling shares, so you have to report a gain or loss from that sale on your income tax return.

Because of how they're treated tax wise, managed payout funds are best used in an Individual Retirement Account or something similar.

As with mutual funds in general, you should pick a payout fund with a low expense ratio, which is a fund's cost of doing business, expressed as a percent of its assets.

"Some are considerably over 1 percent, which I would consider expensive," said Dan Culloton, senior analyst at Morningstar, a fund research firm. "I would treat them like a regular mutual fund and get more suspicious the further they go over 1 percent."

Read the fund's prospectus and understand how it invests.

For example, Fidelity Investments' Income Replacement Funds are similar to target-date retirement funds.

They have preprogrammed asset allocations that gradually shift from stock funds to bond funds as their target dates approach.

At the beginning of each year, the payment rate increases based on a predetermined schedule and is designed so that the payments, while not guaranteed, can keep pace with inflation.

When the fund reaches its target year, all of your remaining principal, including any investment gains, will be returned to you, and the fund will close.

Unlike Fidelity's, the Vanguard Group's managed payout funds don't eventually liquidate.

Vanguard's managers hope to earn enough on the funds' asset allocations to ensure that they meet their payments without dipping into shareholders' principal.

Since payout funds are still relatively new, you should do more homework on them.

"This is an area where investors have to walk and not run," said Mr. Culloton of Morningstar. "Take your time, understand what the fund is doing, figure out how to use it to your advantage and make sure you're going to be in this for the long haul.

"These things really need to prove themselves before anyone can endorse them as a must-have solution for a retirement plan."

Still, if you have an annuity, you could use a payout fund to complement the annuity.

"There is nothing that says that these products can't co-exist in a retirement income plan," said Viktor Szucs, a certified financial planner at Quest Capital Management in Dallas. "Retirees may combine these strategies and use their managed income funds to cover discretionary expenses, while using Social Security, pensions, and annuities to cover fixed ones."

But it's going to take a lot more tools to ensure that you don't outlive your money.

"Managed payout funds can be a good alternative for do-it-yourself investors," said Michael Busch, a certified financial planner and president of Vogel Financial Advisors LLC in Dallas. "They can help you avoid investing too aggressively or too conservatively relative to your cash flow needs in retirement, but it is important to remember that they are a blunt tool, not a precision instrument."

Although payout funds give you monthly income, the payments will fluctuate up and down because you're subject to the volatility of the stock market. In today's investment climate, that's especially important to remember.

It will take you and a financial adviser to figure out many other details, including at what rate you should withdraw money each year from your retirement income portfolio so you don't deplete your assets. The recommended withdrawal rate typically is no more than 4 or 5 percent a year when planning for a 30-year retirement.

Inflation also is a huge factor.

"The two questions the baby boomers must all eventually answer are how much income can they get from their portfolio in retirement, and how large of a nest egg they will they need to get the income they

Equity Indexed Annuities - SEC Proposes Treating Indexed Annuities As Securities

2008-07-01T18:25:00.000-07:00
BY ALLISON BELL

Members of the U.S. Securities and Exchange Commission voted 3-0 to propose a rule that would define some indexed annuities as securities. The proposal would create a new rule, Rule 151A, that would change the way the SEC treats indexed annuities under Section 3(a)(8) of the Securities Act of 1933. If the rule were adopted, the SEC would treat an annuity as a security if its performance were linked to the performance of a security, group of securities or securities index, and if “the amounts payable by the insurer [were] more likely than not to exceed the amounts guaranteed under the contract,” officials said June 25 at an SEC meeting.

If adopted as written, the proposed rule would apply to indexed annuities starting 12 months after a final rule was published in the Federal Register, officials said.

SEC staff members believe insurers have responded to the current ambiguity in the status of indexed annuities by relying on their own analysis of the rules, and the staffers do not want the proposed rule to expose the insurers to new legal risk, several staffers said at the hearing.

Staffers at the meeting argued that the change in definition could offer consumers the benefits of protection by federal suitability and antifraud laws. The commission started the meeting by playing a portion of an NBC Dateline segment that looked into indexed annuity sales practices.

The producers of the segment show one indexed annuity purchaser stating that the indexed annuity markets are selling the products to people who have “one foot on the grave and the other on a banana peel.” The segment and SEC commissioners also talked about the complexity of indexed annuities, the difficulty of comparing different indexed annuity contracts, and features such as surrender periods that expose purchasers to the risk of loss of assets.

One SEC commissioner, Paul Atkins, asked staff members at the hearing about how well state law has handled indexed annuity concerns. “State law has a different focus,” said Susan Nash, associate director of the SEC’s investment management division. State insurance regulators have been working with the Financial Industry Regulatory Authority, Washington, to deal with suitability issues, but their primary emphasis has been focused on ensuring insurers’ ability to meet their obligations, Nash said.

Atkins also asked about the proposal provision that would define some indexed annuities as securities but might let some indexed annuities continue to be regulated under state insurance laws. “Will that create investor confusion?” Atkins asked. Atkins said he looks forward to hearing the many comments he expects the SEC to get on the proposed regulations. Atkins noted that he would rather see the SEC define the status of indexed annuities through rule making than through enforcement actions.

In related news, the SEC also has proposed a change in regulations that would exempt about 24 indexed annuity issuers from the current Securities Exchange Act of 1934 filing requirements.

To qualify for the exemption, an indexed annuity issuer would have to file annual statements and be monitored by its home state insurance regulator.

The insurer also would have to take steps to keep the annuities from trading on any kind of exchange or electronic trading system, staffers said.

Iowa Insurance Commissioner Susan Voss, the chief insurance regulator in a state with a large indexed annuity industry, took time away from flood disaster recovery efforts to express disappointment with the SEC proposal.

“At no time have any of the securities commissioners engaged insurance regulators in the nature of our regulation,” Voss says in a statement. “Letters have been sent to Commissioner Cox, and I’m hopeful for a meeting.”

State insurance regulators have passed intensive suitability standards and continuing education requirements, Voss says. “We take very seriously our consumer protection role, including [issuing] bulletins restricting use of senior designations that are without merit,” Voss says. “We monitor our companies very closely.” In addition, an insurer backs an indexed annuity with its general fund, and the contract is not a security, Voss says. “Of course there can be unsuitable sales with any product, including mutual funds, life insurance variable annuities and stock purchases,” Voss says. “It would appear that those criticizing the most are those that don’t regulate [indexed annuities] or don’t sell them. We should all be working to protect consumers in regard to the products we regulate, not spending time arguing over who regulates what.”

The National Association for Fixed Annuities, Milwaukee, says the SEC should provide an adequate comment period on proposed Rule 151A. SEC officials at the June 25 meeting “provided very little information pertaining to the legal analysis and precedents that were relied upon to construct the proposed rule,” NAFA says. When the SEC releases the exact language of proposed Rule 151A, NAFA will work with NAFA members, other industry associations and lawyers at Jorden Burt L.L.P., Washington, to develop its response, NAFA says.

The American Council of Life Insurers, Washington, says it needs more time to evaluate the proposed indexed annuity regulations but wants to “encourage the SEC to provide a sufficient and meaningful period of comment on any regulatory or interpretive actions.”

Annuity Definition

What are the benefits of a 1035 exchange for my life insurance policy?

2008-07-01T17:00:00.000-07:00
Section 1035 of the tax code provides for nontaxable exchanges of a life insurance policy to another life insurance policy, endowment or annuity contract.

With the many changes in life insurance policies and competition between quality companies in recent years, a person (or trust) may be able to exchange a policy for a new one that provides more protection, a lower premium, or both. The pricing structure of whole life, variable life, universal life and flexible premium adjustable life with secondary guarantees are all different. We oftentimes help people secure coverage today with lower premiums and/or a larger death benefit than what they had issued many years ago. This is due to people living longer, underwriting guidelines acknowledging medical advances and other factors.

Additionally, a life insurance policy purchased years ago may have provided the protection needed, but now there is a need to transfer the asset into an income-generating vehicle. More>>

Life Insurance

Statement at Open Meeting on Equity-Indexed Annuities

2008-06-29T10:47:00.000-07:00
Chairman Christopher Cox
U.S. Securities and Exchange Commission
Washington, D.C.
June 25, 2008
Our next item of business is a subject of great interest to senior investors. For three years, we have been closely partnering with the North American Securities Administrators Association (NASAA) on senior issues, and the recommendation before us this morning from the Division of Investment Management is very much a product of that collaboration.

NASAA has led the way in exposing the abusive sales practices often used to promote equity indexed annuities to older investors for whom they are unsuitable. So too has the Financial Industry Regulatory Authority (FINRA) and the National Association of Securities Dealers (NASD) before it. Two years ago at the national Seniors Summit here at the SEC, NASAA made public its survey results showing the scope of senior investment fraud. As then-NASAA President Patty Struck put it, the survey revealed a landscape "littered with slick schemes and broken dreams" that has been "devastating" to the victims and their families. The survey of state securities regulators showed that 45% of all investor complaints received by state securities regulators are made by seniors. The survey also found that equity-indexed annuities are among a handful of products most often involved in senior investment fraud. For example, cases involving annuities represented 65% of the caseload in Massachusetts, and 60% of the caseload in Hawaii and Mississippi.

Working with our state regulatory counterparts, the SEC has made cracking down on fraud in this area a top priority, and today's proposed rulemaking is a big part of that effort. But let me be clear: the Commission would not be here today working on this topic were it not for the pioneering efforts of Karen Tyler, NASAA's current president, and her predecessors Patty Struck and Joe Borg, who together with our colleagues at FINRA have been highlighting the problems associated with equity indexed annuities for years. This is truly a joint federal-state partnership, and the SEC is proud to be working shoulder-to-shoulder with state securities regulators on this vital investor protection issue.

Equity indexed annuities are investments that insurance companies sell to the public. They were first introduced about 13 years ago, around 1995. They gained ground and grew significantly over the years — in 2004 alone, for example, sales of equity indexed annuities increased over 50 percent, from $14 billion in 2003 to about $22 billion in 2004. In 2007, indexed annuity sales were nearly $25 billion. Today, over $123 billion is invested in indexed annuities.

These products are both simple and complicated. They are simple in that, like other investments, they involve a pay-in and a pay-out. After money is paid in, the value of the investment can grow based on changes in a securities index. At some point, the investor takes the money out, and, depending on when that happens, the terms of the contract and the performance of the index determine whether the pay-out might be more or less than the money the investor contributed in the first place.

That's the simple part. The complicated part is that a variety of fees and charges, limitations on accumulation, calculations of index values, and other detailed features are baked into equity indexed annuities. And although the contract guarantees a minimum value, that's typically less than what the investor gives the insurance company in the first place. As FINRA noted in an Investor Alert, indexed annuities are "anything but easy to understand." FINRA added that, because there are so many features among various products, investors have a difficult time comparing one equity indexed annuity to another.

Surrender charges are another way that investors can find that they get back less money than they put in. The charges can be as high as 15 to 20 percent of the amounts invested. Although the surrender charges decline to zero over time, that process can take more than 15 years. In the meantime, if an investor who buys an equity indexed annuity needs his or her money sooner — for medical expenses or rent, for example — he or she can be forced to forfeit a substantial amount of the investment.

Unfortunately, many equity indexed annuities appear to have been marketed to investors who are least able to scrutinize the details. It's common for these products to be sold as investments to older Americans who are simply in many cases not suitable purchasers. Three years ago, the NASD, now FINRA, raised concerns about the manner in which broker-dealer personnel were marketing and selling unregistered equity indexed annuities. They also sounded the alarm about the absence of adequate supervision of these sales practices.

Today, in 2008, the cause for concern seems greater than ever. Recently, Dateline NBC produced a segment on the abusive sales tactics that are often used to sell equity indexed annuities to seniors. A hidden camera captured the evidence at free lunch and dinner seminars that were followed by sales pitches that downplayed the surrender charges. They also highlighted a number of other abusive and misleading sales methods, such as salespeople with fake credentials and over-the-top presentations designed to instill fear in would-be investors. The SEC was not involved in producing this segment, but I'd like for all of us to watch just a few minutes of it right now…

[short video presentation]…

One big reason that these abusive sales practices have gone unchecked is that the question of whether they are securities at all has been left unanswered. In 1997, shortly after equity indexed annuities were first introduced, the Commission issued a concept release that asked a range of questions about equity indexed annuities. We received a number of letters, which were followed by further debate among industry participants, government regulators, and consumer advocates.

Today we are considering a new rule that would establish — on a prospective basis — the standards for determining when equity indexed annuities are not considered annuity contracts under the Securities Act of 1933 and therefore are securities and thus are subject to the investor protections afforded by the securities laws. These investor protections include the requirement of registration under the Securities Act, and our requirements related to truthful and complete disclosure of the investment to potential purchasers. In addition, investors would enjoy the benefits of protections against fraud and misrepresentation, and additional safeguards against abusive sales practices by unscrupulous marketers. In the future, these protections may significantly reduce the problem of investors being harmed by inappropriate sales of equity indexed annuities.

I would like to thank the staff of the Division of Investment Management for their hard work in bringing this release before the Commission today. I include, of course, Buddy Donohue, the Director of the Division, and especially Susan Nash, Keith Carpenter, and Michael Kosoff, as well as the Office of the General Counsel, including Lori Price and Cathy Ahn, and the Office of Economic Analysis, including Jim Overdahl and Joshua White.

I would also like to thank the leadership of both the North American Securities Administrators Association, especially current president Karen Tyler, and past presidents Joe Borg and Patty Struck and FINRA. Their efforts have been instrumental in bringing to light the investor protection concerns related to equity indexed annuities that we are addressing today.

Annuity Buyer's Guide

SEC Moves to Supervise Equity-Indexed Annuities

2008-06-26T17:06:00.000-07:00
On Wednesday, June 25, 2008, the U.S. Securities and Exchange Commission (SEC) offered a proposed rule 151A under the Securities Act of 1933 that would require that equity-indexed annuities be treated as securities, not as insurance. The SEC’s proposal applies to future sales of equity-indexed annuities, and would take effect one year after a final rule is published in the Federal Register. The proposed rule can be finalized only after a comment period and then by a second vote of the commission.

What is LSW’s Response?

We at Life Insurance Company of the Southwest (LSW) are disappointed with the SEC’s decision, because we believe equity-indexed annuities are insurance contracts and not securities. The inappropriate marketing practices that caused this rule-making proposal can be monitored at a state level more efficiently than at a federal government level. We are going to work closely with the industry and our legal counsel to prepare comments to the SEC. We believe that the SEC’s proposed rule will be challenged in the courts.

How will it impact you?

Traditional fixed annuities and the sale of these products by licensed insurance agents are not affected by this proposal. If the SEC’s new rules become law, then all equity-indexed annuities will be considered securities. These products may have to be modified and will be available for sale only by registered representatives.

Today, LSW continues to receive a significant amount of annuity business from agents who are registered representatives. If the SEC new rule becomes law, we will continue to offer outstanding indexed annuities and traditional fixed annuities to a variety of markets. In fact, we will be expanding our product offerings by developing new traditional fixed annuities with the Guaranteed Lifetime Income Rider and benefit responsive traditional fixed annuities.

We will continue to closely monitor any additional information from the SEC, and we will provide you with more details about its proposal. Later next week, we will be hosting an all field conference call. We will send you call-in information in the near future.

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