{"id":17203,"date":"2017-02-20T16:47:00","date_gmt":"2017-02-20T16:47:00","guid":{"rendered":"http:\/\/www.annuityfyi.com\/?p=17203"},"modified":"2023-02-14T19:40:14","modified_gmt":"2023-02-14T19:40:14","slug":"criticism-buffer-annuities-justified","status":"publish","type":"post","link":"https:\/\/www.annuityfyi.com\/blog\/2017\/02\/criticism-buffer-annuities-justified\/","title":{"rendered":"Criticism of Buffer Annuities: Is it Justified?"},"content":{"rendered":"

\"\"Have you heard of “buffer annuities?\u201d They’re described as sort of a cross between variable and indexed annuities. Through exposure to structured products like options contracts, they boast a protection to the downside in exchange for a cap to the upside. Several industry players have reported an increase in complaints against these products, but according to a recent article<\/a> from Investment News,<\/em> the criticism may not be warranted. <\/span><\/p>\n

One such critic of buffer annuities is Andrew Stoltmann, founder of Stoltmann Law Offices in Chicago, a firm that <\/span>exclusively represents investors from across the country. <\/span> <\/span><\/p>\n

\u201cI can\u2019t think of two more odious products than a combination of a variable annuity with a structured product,\u201d said Mr. Stoltmann. \u201cI feel like when these two investments come together, I\u2019m about to witness the landing of the Hindenburg on the deck of the Titanic. It\u2019s bad, we just don\u2019t know how bad it\u2019s going to be.\u201d <\/span><\/p>\n

This type of annuity is relatively new, having developed after the latest financial crisis as a means to provide insurers with a way to cater to clients looking for caps higher than that of an indexed annuity in a low-interest environment. They were first offered by AXA Equitable Life Insurance Co. with its Structured Capital Strategies product in 2010. MetLife Inc. and Allianz Life Insurance Co. of North America followed in 2013, and Members Life Insurance Co. launched one, the Members Horizon annuity, in July of 2016. And while they\u2019ve been available for several years, it\u2019s only been in the last year, or so, that sales have really grown, and garnered the attention of some regulators. <\/span><\/p>\n

\u201cI spent some time with my team trying to see how this thing works,\u201d said Donald Lopezi, regional director for the Financial Industry Regulatory Authority Inc.\u2019s western region. \u201cIt\u2019s very complicated. I can\u2019t speak nationally ut we are starting to see some complaints on those products in the west region.\u201d <\/span><\/p>\n

\u201cUp until about six months ago, I had never even heard of these investments,\u201d added Mr. Stoltmann. \u201cNow, in the last six months, I\u2019ve got probably six or seven calls from investors who\u2019ve purchased buffer annuities.\u201d <\/span><\/p>\n

Buffer annuities<\/a> are designed mainly for investors with a risk tolerance less than that of a traditional investment-focused variable annuity, but greater than that of an indexed annuity. Specifics vary from one product to the next, but for example, they may have a 10% buffer to the downside, meaning that the insurance company eats the first 10% of market loss in any given year, and the investor picks up the rest. On the other hand, caps are typically around 8-9% as compared to about 4.5% for an indexed annuity. Buffer annuities aren\u2019t invested directly in a market index, like the S7P 500, but instead about 90-95% of the premium buys fixed-income securities. The remainder diverted to derivatives like options, futures and swaps.  It\u2019s this blending of indexed products with complex variable components that have critics concerned.<\/span><\/p>\n

But some feel the criticism is not justified. Senior product manager for annuity solutions at Morningstar, Kevin Loffredi, claims that buffer annuities are more straightforward than indexed or variable annuities with a purchased income rider. <\/a><\/span><\/p>\n

\u201cThere are less moving parts and it\u2019s for a simpler client purpose,\u201d Loffredi stated. \u201cThis is…for clients…looking for accumulation. Living benefits are solving for an income need, which is inherently more complex.\u201d <\/span><\/p>\n

Senior vice president of product innovation at Allianz, Matt Gray, added that there\u2019s \u201c[investor] appetite for something in the middle\u201d of indexed and variable annuities. He thinks that buffer annuities are \u201cprobably the cleanest and simplest way to get there.\u201d <\/span><\/p>\n

In the last four years, AXA has received 43 sales complaints and one Finra complaint, while Allianz, which sold 13,000 policies last year, only received three formal complaints. The issues being reported are similar to variable annuities: suitability and misrepresentation of associated risks. <\/span><\/p>\n

\u201cIt is all about disclosure and making sure the client knows exactly what they\u2019re getting,\u201d said Chris Finefrock, vice president of investments at independent broker-dealer ValMark Securities Inc. <\/span><\/p>\n

Written by Rachel Summit<\/a><\/p>\n

Follow Rachel, aka Finance Mama, on Twitter<\/a> and Google+<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Have you heard of “buffer annuities?\u201d They’re described as sort of a cross between variable and indexed annuities. Through exposure to structured products like options contracts, they boast a protection to the downside in exchange for a cap to the upside. Several industry players have … <\/p>\n

Read more<\/a><\/p>\n","protected":false},"author":5,"featured_media":17204,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[102,34,55,445,75,47,12],"tags":[103,33,54,124,76,46,40],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.annuityfyi.com\/wp-json\/wp\/v2\/posts\/17203"}],"collection":[{"href":"https:\/\/www.annuityfyi.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.annuityfyi.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.annuityfyi.com\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/www.annuityfyi.com\/wp-json\/wp\/v2\/comments?post=17203"}],"version-history":[{"count":3,"href":"https:\/\/www.annuityfyi.com\/wp-json\/wp\/v2\/posts\/17203\/revisions"}],"predecessor-version":[{"id":27000,"href":"https:\/\/www.annuityfyi.com\/wp-json\/wp\/v2\/posts\/17203\/revisions\/27000"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.annuityfyi.com\/wp-json\/wp\/v2\/media\/17204"}],"wp:attachment":[{"href":"https:\/\/www.annuityfyi.com\/wp-json\/wp\/v2\/media?parent=17203"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.annuityfyi.com\/wp-json\/wp\/v2\/categories?post=17203"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.annuityfyi.com\/wp-json\/wp\/v2\/tags?post=17203"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}