Top 10 Index Annuity Misconceptions

Misconception 6: IAs are investments. Wrong! IAs are a safe money place, comparable to other safe money places such as CDs and traditional fixed annuities. To compare IAs to "risk money" places, such as variable annuities and mutual funds, is apples-to-oranges. Consumers buying IAs want the safety of guarantees with the potential of some extra upside potential; they are too risk-averse for securities.

Misconception 5: IAs have countless consumer complaints. In my review of closed consumer complaints of the National Association of Insurance Commissioners database, I found that all 58 current IA carriers had a total of 235 complaints in 2007, averaging just over 4 complaints each. With any single carrier, the complaints ranged from 0 to 95. Interestingly, VA carriers drew a greater number of complaints than IA carriers in the same period on an absolute basis.

Misconception 4: IAs are illiquid. That's false. Only 6 of the 344 IAs available today do not offer the option for 10% penalty-free withdrawals annually (many offer it as early as the first year). In addition, 89% of today's index annuities have some sort of surrender charge waiver, allowing clients to access funds without penalty, say in event of nursing home confinement, disability, terminal illness, unemployment.

Misconception 3: IAs put the consumer's money at risk. The only risk to the IA client's money is if the owner surrenders early, or takes out more than the penalty-free amount. One of the IA's primary attractions is that it provides principal protection. The funds backing the IA are held in the insurer's general account, not a separate account (as with securities). Consumers always have the peace of mind of knowing they are protected by the IA's minimum guarantee. If heaven forbid "something happens" to the insurer, the consumer would be protected by the state guaranty fund–like "sleep insurance!"

Misconception 2: IAs aren't regulated. This is absolutely inaccurate. IAs are fixed products, and thus regulated by the individual state insurance departments. To date, 31 states have adopted the Suitability of Annuity Sales model regulation. The American Council of Life Insurers and the National Association of Variable Annuities have worked on a joint annuity disclosure pilot project modeled on the NAIC Annuity Disclosure Model Regulation. Several states require advisors to take additional continuing education to sell annuities, and the state of Iowa specifically requires 4 hours of CE to sell index products. Products must meet strict non-forfeiture testing, marketing material guidelines and other tests that each state sets forth.

Misconception 1: IAs are complex. That's anti-IA hype. IAs are just fixed annuities with a different way of crediting interest.