Monday, December 15, 2008

When Gummint Intervention is a Good Thing

So-called "Indexed Annuities" (aka "Equity Indexed Annuities") are an interesting product: part insurance, part investment, they're a hybrid that promise guaranteed returns with the potential for even greater profit for the buyer.
So what could go wrong?
One of the worst things a consumer can do when purchasing life insurance is to conflate "insurance" and "investment." In fact, it's illegal for the salesperson to call a life insurance policy "an investment." It's true that certain kinds of life insurance and annuity contracts (called "variable" in the trade) comprise a "sub account" which mimics a mutual fund, but they are first and foremeost insurance products, and need to be viewed as such.
Why is this so important?
The difference between "variable" products and the more pedestrian "fixed" ones is that the latter's rate of return is determined solely by the insurance company, based on its own investment returns (and other factors). They are comparable to bank accounts, in that one isn't going to get a spectaculr rate of return, but there is a guaranteed "floor," so that one gets at least something no matter what. The variable products push that "investment risk" off onto the insured, which can result in very high returns, or nasty losses, depending on the policy owner's choices.
[ed: this is, of necessity, a very brief explication of variable products. For a more detailed explanation, click here]
Many folks hear what they want to hear, and many agents tell a story that they think their prospective customer wants to hear. So variable products may only be sold by agents who have both "regular" insurance licenses and special "Series 6" (or, sometimes, 7) licenses, as well. These are issued by the NASD, and allow the agent to sell investment products. These require taking special classes and tests, are necessary only if one wants to sell these "variable" policies.
So far, anyway.
There exists a relatively new product, which lies somewhere between the fixed and variable worlds, called "indexed" life and annuities. These plans offer a guaranteed interest rate (or floor) like their fixed rate cousins, which the potential of market-related gains like variable products. Although not as complicated as variable plans, they do have more "moving parts" than fixed ones, and require much more understanding on the part of the consumer. Especially in turbulent econimic times such as these, such products are easily conflated with variable plans, which can lead to, um, unfortunate misunderstandings.
And so, Congress is currently considering [ed: nice alliteration!] legislation to require that the sale of these indexed products be regulated like variable ones, and thus subject to NASD oversight and licensing. Not surprisingly, the tone-deaf NAIFA (National Association of Insurance and Financial Advisors) is agin it, and is mustering its forces to fight these new requirements.
I'm in awe that they can say that with a straight face.
The very definition of security products is that they require suitability testing, not to mention more stringent disclosure and marketing criteria than their fixed rate cousins. Of course the NAIFA doesn't want barriers of any sort to these products: they represent a bold new frontier for increased sales. And since, as we've noted previously, the NAIFA exists primarily for the benefit of the carriers, this would be and unwelcome hindrance to their increased market share.
And they want agents and their clients to fight this for them!
Just. Mind. Boggling.
I plan to err on the side of the consumer, however, and will be writing my congress critter in support of "151A" (the licensing/disclosure law), and I urge you to do the same.
Mini Update: Interesting debate going on in the comments section, demonstrating once again that we have the best commenters in the blogosphere.
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