EIA again

[kaneohe]

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Originally Posted by chemist One thing I have picked up on, is the comparisons often ignore the dividends on the S&P 500. In other words, they plot total return on the annuity vs only the price of the S&P 500 w/o dividends being considered let alone reinvested.

Thank you for pointing that out. That's a useful thing to be looking for in the analysis.

[saluki9]

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Originally Posted by 73ss454 It's just sold to people who aren't paying attention. Let's call a spade a spade.

There are plenty of well educated consumers who buy financial products like EIAs, whole life, etc because the products fills a specific need.

[Bikerdude]

Quote:

Originally Posted by chemist One thing I have picked up on, is the comparisons often ignore the dividends on the S&P 500. In other words, they plot total return on the annuity vs only the price of the S&P 500 w/o dividends being considered let alone reinvested.

In addition, the period selected was one of the worst 10 yr periods for the S&P500.

[dgoldenz]

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Originally Posted by Bikerdude In addition, the period selected was one of the worst 10 yr periods for the S&P500.

Every EIA illustration I've seen will either show the past 30 years, 40 years, or have a section that shows the best 10-year period, worst 10-year period, and last 10 years.

[73ss454]

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Originally Posted by saluki9 There are plenty of well educated consumers who buy financial products like EIAs, whole life, etc because the products fills a specific need.

When you say plenty does that mean about 1% of the people who actually buy/get stuck with this stuff. I would say that most people are sold these products for commission sake and not to fill a need. There is always the exception.

[dgoldenz]

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Originally Posted by 73ss454 When you say plenty does that mean about 1% of the people who actually buy/get stuck with this stuff. I would say that most people are sold these products for commission sake and not to fill a need. There is always the exception.

Ask people that have bought EIA's over the past 5 years whether they are more satisfied with their EIA or the rest of their portfolio. Ask anyone with permanent life insurance that's ever become uninsurable whether they're more satisfied with the product they bought or if they would've rather had a term policy instead. I'll wager a nickel it's more than 1% in both cases.

[73ss454]

Stop it, I just checked my records and OK it's 1 1/2%. I owe you a nickel.

[kaneohe]

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Originally Posted by 73ss454 When you say plenty does that mean about 1% of the people who actually buy/get stuck with this stuff. I would say that most people are sold these products for commission sake and not to fill a need. There is always the exception.

The claim at this talk was that there is no upfront commission so that everything goes into the investment. The insurance company may pay a commission to the agent and that may reduce the return from what it might have been otherwise, but is supposedly reflected in the claimed return.
In other words, the agent may get a commission but the buyer may not care if his return is satisfactory.......e.g. return 0% instead of -40%. I'm not sold on these things but that doesn't sound bad. I'm looking to poke specific logical holes in their sales pitch.

[dgoldenz]

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Originally Posted by kaneohe The claim at this talk was that there is no upfront commission so that everything goes into the investment. The insurance company may pay a commission to the agent and that may reduce the return from what it might have been otherwise, but is supposedly reflected in the claimed return. In other words, the agent may get a commission but the buyer may not care if his return is satisfactory.......e.g. return 0% instead of -40%. I'm not sold on these things but that doesn't sound bad. I'm looking to poke specific logical holes in their sales pitch.

The information you have is correct. The salesman gets a commission, but 100% of your premium dollars are credited to the purchased annuity. As I stated earlier, the people who bought EIA's over the past few years could surely care less how much the salesmen made since they didn't lost 40-50% when the market crashed. Do you have the potential for a 40% positive swing in one year? No, but if that's what you're after, it's not the right product. People being EIA's are less concerned with the potential for large returns and more concerned with preserving what took them 40 years to build up.

[brewer12345]

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Originally Posted by kaneohe The claim at this talk was that there is no upfront commission so that everything goes into the investment. The insurance company may pay a commission to the agent and that may reduce the return from what it might have been otherwise, but is supposedly reflected in the claimed return. In other words, the agent may get a commission but the buyer may not care if his return is satisfactory.......e.g. return 0% instead of -40%. I'm not sold on these things but that doesn't sound bad. I'm looking to poke specific logical holes in their sales pitch.

So the fact that they take 50 cents worth of hamburger out of your left cheek instead of your right cheek means that they don't take a bite out of your ass?

And then let's not forget all of the insurance company overhead and profit that has to be covered out of your hide.

And let's not sweep the issue of carrier risk under the rug, either. After all, this product is typically not sold by the creme de la creme of this industry.

Finally, this is a very simple product that insurers love to unnecessarily complicate (to their benefit). Anyone with a brokerage account can replicate this product in 5 or so minutes and skip the commission, overhead, carrier risk, long surrender penalty period, etc. I have even detailed how to do so in the past.

[dgoldenz]

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Originally Posted by brewer12345 Finally, this is a very simple product that insurers love to unnecessarily complicate (to their benefit). Anyone with a brokerage account can replicate this product in 5 or so minutes and skip the commission, overhead, carrier risk, long surrender penalty period, etc. I have even detailed how to do so in the past.

Your math doesn't work with current costs and CD rates though...go back and try it yourself. It's also still taxable instead of being tax-deferred.

[FinanceDude]

This is about to get interesting. Brewer's plan does involve derivatives to subrogate the risk..........

That being said, I am NOT a fan of EIAs...........never have been. Over half the agents selling them don;t understand them either. Finally, EVERYONE on here knows how I feel about insurance agents that hold themselves out as financial advisors or planners when they only have an insurance license..............

[dgoldenz]

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Originally Posted by FinanceDude This is about to get interesting. Brewer's plan does involve derivatives to subrogate the risk.......... That being said, I am NOT a fan of EIAs...........never have been. Over half the agents selling them don;t understand them either. Finally, EVERYONE on here knows how I feel about insurance agents that hold themselves out as financial advisors or planners when they only have an insurance license..............

Can't argue with either of those. Half of insurance agents don't understand how any insurance works, which is part of the reason 90% fail out in the first year.

[dgoldenz]

Also, just as an example, Lincoln has an EIA with a guaranteed minimum 2% on 100% of premium. The current fixed account rate is 2.8% and if the S&P goes up at all (even .001%), 5.15% is credited. If the S&P goes down, 0% is credited. In order to guarantee a minimum of 2% on 100%, you would need over $100,700 just for the CD part of the equation based on the 1-year average of 1.29% posted by bankrate.com. That leaves $0 for the second part of the equation and is more than the principle. The EIA is also tax-deferred instead of taxable.

[MichaelB]

Here's an interesting idea - buy dividend swaps from the banks selling the EIA's. As suggested by James Montier at GMO. https://www.gmo.com/America/CMSAttac...UpfWuJTwQEjUud

What happens to the dividend part of an index return under an EIA?

[dgoldenz]

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Originally Posted by MichaelB Here's an interesting idea - buy dividend swaps from the banks selling the EIA's. As suggested by James Montier at GMO. https://www.gmo.com/America/CMSAttac...UpfWuJTwQEjUud What happens to the dividend part of an index return under an EIA?

The link doesn't work without a username and password. Dividends are not included with EIA's as they are not a security - the crediting method is simply based on the S&P (or another index). There is no direct market participation, it is only a benchmark for calculating the returns credited on the annuity.

[73ss454]

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Originally Posted by kaneohe The claim at this talk was that there is no upfront commission so that everything goes into the investment. The insurance company may pay a commission to the agent and that may reduce the return from what it might have been otherwise, but is supposedly reflected in the claimed return. In other words, the agent may get a commission but the buyer may not care if his return is satisfactory.......e.g. return 0% instead of -40%. I'm not sold on these things but that doesn't sound bad. I'm looking to poke specific logical holes in their sales pitch.

Log onto Pen Fed and buy a 5% CD without the 40 pages of disclaimers that no one understands.

[brewer12345]

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Originally Posted by 73ss454 Log onto Pen Fed and buy a 5% CD without the 40 pages of disclaimers that no one understands.

Ding, ding, ding, we have a winner...

[MichaelB]

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Originally Posted by dgoldenz The link doesn't work without a username and password.

Register. It is cost and spam free.

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Dividends are not included with EIA's as they are not a security - the crediting method is simply based on the S&P (or another index). There is no direct market participation, it is only a benchmark for calculating the returns credited on the annuity.

Right. I was making a point. What's the point of investing in an index linked product that excludes half or more of the future index return?

[dgoldenz]

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Originally Posted by MichaelB Register. It is cost and spam free. Right. I was making a point. What's the point of investing in an index linked product that excludes half or more of the future index return?

An EIA is not an investment, otherwise it would be a security. You could make an EIA that tracks the cost of bacon or anything else for that matter. The S&P is simply used as a benchmark to determine the crediting rate. Think of it as a fixed annuity with a variable interest rate.