Making a Pitch For and Against Indexed Annuities

Consequently, a registered rep sees the commission on an IA and assumes it's too high a price for a policyholder to pay, Moore said. However, when spread over the life of an IA contract, that one-time commission equates to what a registered rep would get on an annual basis. "You're comparing 1.5 percent a year every year for four years to 6 percent upfront on a four-year product which is exactly the same," she said. "They don't understand the commission works different than theirs, so automatically it's a high commission product and that means it's not good for the client."

Further, Moore said that she believes much of the disdain for indexed annuities stems from past suitability issues with one company and one product in particular. "The whole index annuity industry got a bad rap because of it," she said.

High commissions are also a thing of the past. When IAs first came on the scene in 2000, some advertisements touted indexed annuities with commissions as high as 16 percent. Yet Moore pointed out that due to state regulations, surrender charges have gone down, and with them, so have agent compensation. She cited three IAs that currently offer double-digit commissions in the 10 percent to 12 percent range, which don't account for much in the way of sales. The highest commissions tend to be around 8 percent, she said.

"Indexed annuities are far different today than they were even four years ago. Today, there is no such thing as an indexed annuity with a 16% commission," Moore said.

Currently, insurance agents receive an average commission of 6 percent on an indexed annuity contract, according to Moore. "That commission is paid one time and he has to service the contract for life."

With that said, Moore agreed that indexed annuities are not for every investor and, yes, upside potential is limited. For that reason someone who doesn't mind having their portfolio rise and fall on the gyrations of the stock market would be better served with a variable annuity.

"The indexed annuity is more for the person who says, look, I don't feel comfortable losing a single penny of my money," Moore said, "and if that means I don't get the whole 20 percent when the market goes up 20 percent, that's OK with me. I just want to be able to outpace my CDs or fixed annuities."

Not all registered reps are anti-indexed annuities. Matt Golab is a registered investment advisor and a licensed insurance agent at Aaron Matthews Financial Resources in Elk Grove, Calif. He said that in certain instances, particularly for older clients, IAs make perfect sense. The problem may lie, he asserted, with salespeople not fully understanding the product and therefore, misrepresenting its attributes to potential buyers.

"There are people who are presenting these as stock market equivalents but there is a reason 151A didn't pass and it's because the risk and the income potential just isn't there," Golab said. "These index annuities are designed to compete with savings products, jumbo CDs, high-yield CDs, and give a little bit better return. They are designed to compete with themselves, with a fixed annuity. They are not designed to be giving a 20 percent to 30 percent [return]. I think maybe the lack of education from some salespeople gets these presented to people in the wrong way, which leads to some of the negative publicity."

As for the lack of upside potential, Golab said that due to stock market upheavals in recent years, some investors are fine with earning less on their money even when the market has a steep rise. "Because of what the market has done to their balances the past 10 years, they are very comfortable with [that]," he said.

And for some investors, the income riders on IAs are particularly appealing, Golab said. "Whether it's an IRA or a non-qualified account, if people are looking for income, guaranteed at an absolute minimum, the income rider that is offered on these equity indexed annuities is just unmatchable," he said. "It comes back to education. These are either being offered incorrectly or not offered at all. And that leads to negative publicity. But they are such useful vehicles for accomplishing what retirees are truly saying [they want], not how we fit it into what we know."

Yet, income riders must be explained to the buyer properly, Golab stressed. "Too many times we hear that that income rider percentage is a real interest rate. That's not what it is designed for. It's not an interest rate. It's something to guarantee people an extra pension sometime in the future," he explained. "In that way, these equity index annuities are very fitting for people's retirements, based on what they need."

It all comes down to selling the most appropriate product to each individual. Criticizing any insurance product is wrong when it turns off potential buyers who may benefit from the contract, Moore said. "Every product in the insurance industry is suitable for somebody."

Can the two sides ever get along? There are some signs of a thaw between the two parties. As Moore pointed out, several carriers have recently introduced IAs to be sold via banks and wirehouses. "So that disposition about indexed annuities being a 'bad' productthat is going to go away," she said, "and we are not going to see the badmouthing of the index annuities that we used to."