Follow Up to Long Live the 20% Surrender Charge & Equity Indexed Annuities Debate

I've recieved quite a few comments from people on my recent article "Long Live the 20% Surrender Charge." Most of the comments were complimentary, but evidently I ruffled a few feathers in the insurance agent community (which is of course the point). I received e-mails from a few reps who called themselves Independent but then claimed to be senior reps with one of the companies mentioned. I don't see how you can be a "senior" rep with a company and still be independent, but that's another story.

I was accused of not presenting the whole story or just not being fair. One agent told me the product had been discontinued, another told me that he had placed 200 clients in that product (a truly scary thought and not something I'd readily admit too). None of these agents actually disputed that these products exist or existed, which is of course the point.

I recieved one e-mail that told me AVIVA now offers a product with only a 12% surrender charge.....only. If this doesn't tell you what is wrong with the 403(b) market, I don't know what will. I can't imagine a 401(k) plan with a 12% surrender penalty and a lousy interest rate, it may happen, but it isn't bragged about as in the 403(b) world.

Companies that are offering products with 10 year surrender periods and excessive surrender penalties shouldn't be allowed to offer products and their agents should be banned from school districts.

Equity Indexed Annuity

Recently I came across an industry publication that is supposed to be for "insurance agent use only" and it listed fixed annuity products along with their corresponding surrender periods, beginning surrender charges, and commission rates. What interested me the most was the commission differential between a traditional fixed rate annuity and the equity indexed annuities that seem to be so hot right now. I'll use Great American as an example since they sell 403(b) products, though keep in mind that I don't know if the products listed are available in the 403(b). What I want to demonstrate are the incentives agents have to sell one type of fixed annuity versus another.

Company Product Sur Period Sur Charge Commission
Great American American Freedom 10-ST 10 Years 9% 8%
Great American American Legend EIA 10 Years 10% 9%

Now, this is actually a pretty good differntial, there isn't that much incentive to sell an Equity Indexed Annuity over the straight fixed product, but there is still an incentive, one must ask why? Some companies have differentials of 7% or more which means an agent would get paid up to 7% more to sell an equity indexed annuity over a traditional fixed annuity, this is just wrong. I'm not picking on Great American, I'm picking on the insurance companies, agents, and marketing companies that continue to lie about the equity indexed annuity and pay higher commissions to promote them. The concept of an Equity Indexed Annuity could actually work (though not like presented by most agents) if it was done on an honest, simple, and commission reduced basis. The industry won't listen, they make way to much money on these products.

I'd love to continue to hear your thoughts and opinions on Equity Indexed Annuities and excessively high surrender charges on fixed products.

Scott Dauenhauer, CFP, MSFP