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Evaluating Index Annuity Returns

Last update on: Jun 22 2020

Indexed Annuities can be a tough sale for insurance brokers, partly because they’re very complicated. A recent article in the Journal of Financial Planning appeared to cut through a lot of the problems by taking actual results from annuity contracts and showing that they outperformed a benchmark. But, not so fast. Robert Huebscher of AdvisorPerspectives.com wrote that the conclusions aren’t valid. First, he says the authors weren’t able to make available the data they used so that others could test it to try to reach the same results. Second, he believes comparing the contract returns to the S&P 500 without dividends isn’t appropriate. He believes an index that is 85% 10-year treasury bonds and 15% the S&P 500 (with dividends) is more appropriate. Third, he says after-tax returns of the contracts and the annuities should be compared, not pre-tax returns. He offers other criticisms before offering this advice which should be familiar to readers of Retirement Watch:

When considering this study, don’t lose sight of the bigger picture.  By the authors’ own admission, EIAs provide downside protection against market declines with limited upside potential in bull markets.  That return profile will appeal to certain very risk-averse investors, particularly those who are indifferent to the risks of carrier default and surrender penalties.  But the return profile of an EIA can be replicated, either with an 85/15 portfolio, as Reichenstein suggests, or with some other combination of Treasury securities and either index funds or options, as other authors have advocated.  That leaves a very small universe within which EIAs are appropriate.

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