Index annuity real returns

I am on record as being anti-annuity with the exception of the immediate kind. That said, the terms for annuities seemed to have changed from the time I formed my opinion, and if I saw a prospectus confirming this I may change my mind. I am hearing of indexed annuities that offer 100% participation (i.e.

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First off, losing the dividends takes a *huge* hit on the overall annual return. At the moment, it's back to around

FWIW, I haven't seen one which had both 100% participation (even without the divs) *and* a cap as high as 15%.

For 1.9%/yr, you could take some cash and buy some long-dated SPY options to protect some of your down side.

Or you could put together a blended portfolio of stocks and bonds and get, based on historical performance, most of the total return with vastly less volatility, especially if you're comparing a blended portfolio which includes the dividends against an S&P500 without them. Take a look a the history of, say, VBINX. Down only 9.5% in

I'd be shocked - shocked - to see such an index annuity beat the blended, low-cost portfolio over the very long term.

The problem with some of the analysis is sample selection.

The last 10 years have been ugly. But even in these last

(to come up with that estimate, I took approx 1.5% off of the annual total returns of the S&P500 and then applied the cap and floor - note some problems with this - (a) that's not the real div yield, (b) I applied the caps on the calendar years - the specific period may have a huge impact on this - the floor applied to 4 of the 10 years and the cap applied to two of them - I suspect that if you applied the cap and floor monthly, the cap would whack away at more return because the returns are so volatile.)

Anyway, that particular index annuity formula, at least as I applied it, has come up pretty impressive in an ugly 10 year period. Do you have a specific annuity you saw with those terms? I'd like to look at it a little more closely.

I suspect when when the "indexed" kind become mainstreamed, ie. when a Fideleity or Vangauard offers them with no penalty and minimal fees like the other kind of annuities, then they may be worth lookign at. Right now salesmen make 6-10% commision on them and are pushing them really, really hard.

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Index annuities are dangerous and probably require more due diligence than other annuity product available. I'm pro-annuity, for the record, and yet I've never sold one. The reason you're get "mixed messages" is because the insurance companies do a terrible job (intentionally?) of disclosing exactly how equity-index annuities (EIA) work. Finra and the SEC technically classify EIAs as fixed annuities and therefore are exempt from the disclosure and liscensing requirements associated with variable annuities. I, personally, feel this is a mistake on the regulators part.

To answer your question, you're going to need to pour through the prospectus. Each EIA is different and the devil is in the details. On the surface, EIAs should seem simplistic, but there are caveats galore! Most have a minimum interest rate they will credit and a maximum interest cap. I saw one EIA just the other day in which the max cap rate applied monthly and the minimum interest credit was applied annually. In a volatile market, that's a pretty sneaky way to lower your returns [you can wipe out an entire years returns in one bad month, but you can't gain it back in an equally positive month].

EIAs also have a participation rate. Like the name suggests, if you have an 80% participation rate, then you earn 80% of what the index earned (subject to the minimum floor and maximum cap discussed earlier). As Joe said, dividends are often not credited, either.

Fees are deducted from earnings and can be both elusive and excessive. Again, read the prospectus.

Lastly, surrender fees can be brutal. For example, the "Allianz Masterdex 10" EIA (this is the one I had the unfortunate chance to encounter the other day) stipulated that if you EVER surrender the contract you receive the LESSER of your original investment compounded at 1.5% annually or the actual contract value. Suppose $100k with an

Good luck and for God's sake, CAVEAT EMPTOR!

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Unfortunately, no. I've reviewed bad ones by having people email me a prospectus, but this set of numbers came from someone who took notes during a meeting and offered me little more than the data I posted. For this person, any use of options, or mixed portfolio wasn't really a choice. I was asked to comment on this product without the chance to offer much in the way of alternatives. I looked at it two ways - first, the guarantee that a 2000-2 will not cause a loss, which of course is just one point, but important for some. The more abstract way is this - Bell curve, centered on 10% long term return, with about 15% STD deviation. Giving up the dividend shifts left by 2%, and upper tail (over 15%) is cut off. For this, the whole tail below 2% is also cut off. I'd have more to say if I were sent he whole prospectus, of course. Joe

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As you know, I will occasionally rant and rave here about how hard to understand these products are. I believe it is, at least partly, intentional. I once had a vice president of a major phone company tell me that they didn't want customers to understand the plans and pricing. Confusing pricing makes it hard to comparison shop.

It the case of these annuities, it makes the customer dependent on the salesman to explain them, which gives the salesman the opportunity to spin the product as necessary.

-- Doug

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