Portfolio Review

  •  

    Questions about your current portfolio or seeking a second opinion?     
    Speak with one of our     advisors
    or call 866.545.8816. (New clients only.)
    All other needs, call 800.711.2027.

     

Equity-Indexed Annuities Update PDF Print E-mail
Written by Tiya Lim   
Tuesday, 24 February 2009 00:00
Overview:
This article discusses changes to the regulations of equity-indexed annuities and how bear markets impose additional credit risk to the securities.
 
Equity-indexed annuities (EIA) are highly complex investment vehicles that are designed in favor of the seller, not the buyer. Several disadvantages are notable, including the following:
  • Risk associated with the credit quality of an issuer
  • Tax inefficiencies associated with investors who withdraw funds from EIAs and beneficiaries who inherit them
  • Potentially high surrender charges and fees
  • Potential restrictions that decrease expected returns
The SEC passed a rule in December 2008 to allow for EIAs to come under SEC rules and regulations instead of the insurance regulating bodies of each state. The SEC issued a press release to say that the new rule will “help protect seniors and other investors from fraudulent and abusive practices that can occur in the sale of equity-indexed annuities.”1
 
Regardless of how strictly EIAs are being regulated, the credit quality of the issuers is an important consideration because the EIA guarantee is only as good as the credit of the company providing the guarantee. If investors do not verify the investment grade rating of the company before purchasing EIAs, they may be putting their portfolios at risk.
 
The only real benefit of the EIA is the guarantee, which often must be held for 10 years to have any value. However, during severe bear markets (when the guarantees are the most valuable), the ability of the insurers to honor the guarantees may be in question. Current market conditions have already triggered downgrades in several insurance companies’ credit ratings. Reuters reported downgrades by Fitch and by Moody’s for Hartford Financial Services Group Inc., Principal Financial Group and Lincoln National Corp.2 Additionally, Standard & Poor’s has issued several negative credit watches for AIG, Valley Forge Life Insurance Co. and SwissRe. This credit risk is another cost that is often not accounted for and one that many investors never anticipated showing up.
 
For more information on EIAs, please see Chapter 18 in The Only Guide to Alternative Investments You'll Ever Need by Larry Swedroe.
 
1   SEC Improves Protections for Seniors and Other Investors in Equity-Indexed Annuities. Securities and Exchange Commission, December 17, 2008.

2   Lilla Zuill, U.S. Life Insurance Stocks Fall on Rating Worries. Reuters, February 10, 2009.

Copyright © 2009, Buckingham Family of Financial Services. This material and any opinions contained are derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Information regarding references to third-party sites: Referenced third-party sites are not under our control, and we are not responsible for the contents of any linked site or any link contained in a linked site, or any changes or updates to such sites. Any link provided to you is only as a convenience, and the inclusion of any link does not imply our endorsement of the site.

For a free consultation and to speak with one of our investment advisors, please call 866.545.8816 or submit our contact us form.


Add this page to your favorite Social Bookmarking websites
Reddit! Del.icio.us! JoomlaVote! Google! Live! Facebook! StumbleUpon! Yahoo! Free social bookmarking plugins and extensions for Joomla! websites!