Equity Index Product
From the agent’s standpoint, what could be better? The commission is substantial and on-going management is usually never needed or offered. The guarantees look great along with the potential upside. The key word is potential upside. These products are often sold with the premise that you can achieve 100% of the market (S&P 500) returns. What agents ignore is the probability of that happening.
The truth is, these product usually work off an equation. The variables in that equation include monthly caps and minimum rates and return. Since each equity index product is unique I will have to look at the specifics of a contact in question. That being said, do you think the actuaries of these companies are going to make the equation in your favor? The answer is no. The insurer is banking on a long term holding period in which its equation will become profitable for itself leaving you with returns that are far less then market results and, in some cases, below CD rates. The insurer can also guarantee a long term holding period since the penalty for getting out early is severe (up to 15% in some cases). It’s mathematics at its best.
I guess having a degree in math makes me a bit more suspicious of these products. It’s also interesting that you don’t need a securities license to sell this type of product since there really isn’t any investment product in it. Your money is simply tied to an equation. If you are considering this type of product or already own one, do yourself a favor and contact me immediately. I will review your product and discuss your options. Below is an example of a popular equity index product.