How Have Fixed Index Annuities Evolved And How Are Consumers Protected?

By Casey Kuhn
Published: Tuesday, July 3, 2018 - 11:07am
Updated: Tuesday, October 16, 2018 - 3:33pm
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They say the earlier you decide to invest your money, the better. But, before you sign anything, you need to know exactly how your money may, or may not, perform — especially in a fixed index annuity. The market for these insurance products has boomed, but the complexity of these investments may feel misleading to the average consumer.


If you’re of retirement age, you may have been solicited by someone selling fixed index annuities as an investment tool for a lifetime income.

This can be true for many people. This story will dive a little deeper into these increasingly complex insurance contracts.

Before we get started, let’s define what a fixed index annuity is.

Sheryl Moore, CEO of Moore Market Intelligence, an indexed annuity consulting firm is an expert on the insurance product.

“A fixed annuity receives an interest rate that is declared by the insurance company," Moore said. "An indexed annuity actually receives interest based on the performance of an index.”

Let’s break it down even further.

An annuity is a contract where an insurance company agrees to pay income in exchange for money invested.

An index is a formula, typically made by banks, that insurance companies use to determine how much money you earn over time. The index can be based on any type of market and how it changes, like the stock market.

So how do you know which one is best? 

“I think that the best index to use on an indexed annuity is whatever index the purchaser understands the best,” Moore said.

The problem comes when indexes become so complex, it can be difficult for the insurance agent selling them to explain what they are for customers.

Sometimes a new indexed annuity will be marketed with charts showing a hypothetical performance of your money with returns of 8, 9, 10 percent or more every year.

But, the only guarantee is you won’t lose money if the market drops.

Those charts can persuade people, who still don't underestand how the index in the annuity works, to buy. And that can lock up money for years, with severe penalties for canceling.

Fixed Index Annuity Marketing Can Feel Misleading To The Unwary Consumer

Mary Lou Thurston is 76 years old and lives with her disabled daughter, two cats and a small, rambunctious dog.

She’s made almost 50 quilts in the last few weeks for the retirement home nearby in Surprise.

“My house is kind of a mess because I’ve been busy," she said. "I’ve been making these for care centers.”

Thurston is retired after working as a secretary at Honeywell. When it comes to financial matters, she feels a little out of her element.

That’s why she went to a seminar in 2008 after getting a flyer in the mail. She trusted the man advertising the seminar to put her money into something that would help her daughters after she dies.

“That’s all I have in life is my two daughters, so I’m gonna take care of them best I can,” she said.

Then she rolled her money into a new fixed index annuity in 2014, per that same advisor.

“He says, 'You really need to change,' and then he raised his voice when I said I didn’t want to," Thurston said. "So he kind of pressured me and I went and I said, 'OK, I’ll go with it,' but, I says, 'I'm trusting you.'”

But after fees started eating into the money she put into her new annuity that wasn't growing like she thought, she was confused. The annuity’s annual payment wasn’t covering the large life insurance policy she took out in tandem either.

She also lost money in her principal when she switched to the new annuity on the recommendation of her advisor. 

And now, after being approached by a different financial advisor, Thurston feels she was duped by an agent who made a commission for selling the product no matter how well it did for her.

“I was blind, you know, blindfolded," Thurston said. "I just didn’t know what I was signing. It wasn’t a clear picture to me, and I just put my faith in my agent.”

The Arizona Department of Insurance also warns against high-pressure sales tactics when buyers, like Thurston, invest their money.

Some critics say these complicated products being pushed on retirees looking for an easy investment have made insurance companies billions of dollars.

Another criticism is that there isn’t enough oversight on how these new, complex annuities are made and sold.

The problem there, though, is if a consumer like Thurston signed on the dotted line, no matter how much she understood, there’s not much regulators can do. Agents are required to give as much information on the product as they have, and to look at their clients needs.

Stephen Briggs is a spokesman at the Arizona Department of Insurance.

“It’s buyer beware,” Briggs said.

The department has received more than 100 complaints since 2010 about fixed index annuities. That’s a tiny fraction of the number of products sold. But, more than half of the complaints claimed the annuity seller misrepresented the product. Even then, only 9 of those misrepresentation complaints were found to be valid. That means the Department of Insurance finds the complainer did have a case against the company to find restitution.  

Briggs says annuities, when used correctly, can be a good investment tool.

“These can be excellent products for people," Briggs said. "Products that, if properly planned for, can sustain people in those twilight years.”

Arizona has several consumer protections in place. One 2017 law requires insurance agents do four extra hours of education on annuities, if they sell them. And, Arizona conforms to the industry standard that gives senior citizens more protection. If you’re over 65 years old, you have a 30-day trial period where you can take your money out of the annuity with no penalties. If you’re under 65, that period is 10 days.

"What laws like these are attempting to do is just provide accountability that the person you are trusting to sell you the right product has some level of standardized education so they can't walk away and say 'I didn't know,'" Briggs said.

Typically, the penalty fee for taking your money out of the annuity lowers the longer you have it. And the payments coming from an annuity can last through retirement years like a fixed income, depending on the kind you have.

In 2006, Arizona adopted a model that more clearly defines how an insurance agent is allowed to figure out whether an annuity is a good fit for their consumer. This is called suitability.

These fixed index annuities are typically targeted at Baby Boomers with money to invest. Arizona has an annuity consumer guide specifically for seniors.

That guide says, in the first paragraph, “be aware that annuities are not liquid investments and may tie up your money for several years.” It continues to call annuities “complex contracts … easy to misunderstand or be misled about the benefits and risks.”

Other states have stricter protections on annuity marketing.

Another criticism is brand new indexes in annuity products don’t have a working history like traditional markets. For example, if instead of basing the annuity money change over time on the S&P 500, your annuity money fluctuates based on how multiple markets perform.

Industry expert Sheryl Moore says these so-called hybrid indexes have exploded as interest rates stay low.

“Sometimes these indexes are launched on the day that the product launches," Moore said. "So they have no history, which is a stark contrast to some indexes like the S&P 500, which have years and years of history.”

Moore warns to never look at the past performance of any market to see how the future performance would be.

So, if there is no past, it shouldn't matter.

But, industry groups say it might, especially when it comes to marketing the fixed index annuities.

The National Association of Insurance Commissioners (NAIC)  has several working groups that draft guidelines for how insurance products are marketed. Sometimes products have illustrations, or charts, showing the hypothetical performance of the money you put into an annuity over several years. 

The one guarantee in a fixed index annuity, which makes it a conservative investment product, is you will not lose your money if the market drops.

So, how should an insurance company make up a diagram for an index that has no proven history?

One NAIC working group is talking about possible new guidelines to make sure those illustrations can't be used if there’s no index history.

That’s to be determined, but that kind of scrutiny gets to the heart of the criticism that these are new, complicated and opaque indexes. New, complicated and opaque: not consumer-friendly words.

More Indexes, More Annuities, More Competition, More Money

Insurance companies don’t see it that way. More products mean more competition and better annuities to sell.

About half of the dozen complaints to Arizona’s Department of Insurance last year about the fixed index annuities were from the top three sellers of of the product: Nationwide, Allianz and Athene Life Insurance Companies.

None would do an on-the-record interview about these products. Two emailed statements.

Allianz’s statement about marketing fixed index annuities said they call customers over age 75 to review the product. They also have educational options for agents.

Nationwide’s statement said about critics of the product that the company is "aware of individuals who have mischaracterized how fixed index annuities are marketed and sold." Nationwide said those critic’s objections "are intentionally cherrypicked to support their agenda."

Athene declined to comment after an off-record phone call with a senior sales executive.

Best practices for selling these products are still being hammered out at the regulatory and self-regulatory level while the annuities continue to evolve at a fast pace.

Arizona’s new rule of more education for agents could be a start.

Another criticism of fixed index annuities is that some new indexes being used seem to perform like a security product. That would mean an agent who is licensed to sell only insurance can’t technically give security investment advice.

Annuity expert Sheryl Moore explains that argument best.

“If the consumer says, ‘Hey, valued agent. What is XYZ index, I’ve never heard of that?’ And the agent who is talking to the consumer does not have his securities license and answers the question, ‘What is XYZ index?’ then that agent is giving unregistered investment advice,” Moore said.

Giving unregistered investment advice is illegal without a license from the federal Securities and Exchange Commission.

In a scenario where a senior citizen who doesn’t know a lot about investing is presented with a brand-new product with a complicated index, it seems natural they would ask questions about said index.

If these insurance products are behaving, defined and explained more like security products, shouldn’t they be registered as a security rather than insurance? Federal precedent law says no, and these fixed index annuities will continue to be registered legally and sold legally by the insurance agents licensed to sell them.

EDITOR'S NOTE: The video has been updated to clarify what a fixed index annuity can typically guarantee.

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