Why Indexed Annuities Have No Prospectus
Variable and Indexed Annuities Represent a Majority of Annuity Sales
There are over fifteen different types of annuities on the annuity planet. The top two types that represent over 75% of total annual annuity sales are variable annuities and fixed index annuities (aka indexed annuities). Realize there are over $200 billion of annuities sold in the United States every year, and you understand three-quarters of that number is a big chunk of change. Variable and indexed annuities are the sales leaders due to the fact that there is a growth portion within the annuity structure, as well as the ability to add riders (attached benefits) to the policy.
These separate guaranteed calculations solve for things like income for life, confinement care coverage, or a guaranteed death benefit. Despite the complex nature of the products, their popularity isn't surprising. Who doesn't like an option for growth? Who doesn't like additional options? Just remember the details and associated costs are in the fine print whether an annuity comes with a prospectus or not, so read the fine print.
Variable Annuities Come with a Prospectus
The reason that variable annuities come with a prospectus and indexed annuities don’t is because variable annuities are considered a security. Variable annuities are considered a security product because the investment side of this type of policy provides mutual fund type choices for growth. The annuity industry actually calls these “separate accounts”, but in essence, they function just like mutual funds. Mutual funds are definitely considered a security, so the variable annuity correlation is an easy one to make.
Indexed Annuities Have No Prospectus Because They Aren't Considered a Security
Indexed annuities are not considered a security, but are instead categorized as a life insurance product. In the recent past, there was an argument that indexed annuities act as a security and should be treated as such. There was an industry fight between the life insurance world and the securities world over this designation. It was a bloody war, but in the end, indexed annuities were not officially recognized as a security. The actual case is known as “Ruling 151”, and there are still some deep wounds on both sides from the fight.
I predict that the argument whether an indexed annuity is a security will rear its head again in the near future due to unregulated sales practices and the free for all environment surrounding the product.
Ruling 151 Determined that Indexed Annuities Aren't a Security Product - For Now
In the past, indexed annuities were actually called equity indexed annuities. After the “151 fight” I think the decision was made to officially drop the word “equity.” Equity or equities is another way to refer to stocks, and this was probably another reason that there is an annuity industry push to never use the equity word again. If the designation as a security ever does come through, many sales agents would have to take much more rigorous testing to gain the necessary securities license to sell them.
Indexed Annuities Are Not Securities, but Do Offer a Call Option With Possible Gains
Indexed annuities actually fall under the fixed annuity category. The industry likes to call this strategy a fixed index annuity. Because indexed annuities are fixed annuities, the product provides full principal protection from any downside turn in the market. The upside potential is attached to a call option on an index like the S&P 500. Any gain in the option, which is typically one year in length, is credited to your annuity account. That gain is limited by the carrier, and any gains are typically locked in only one day per year.
The bottom line is that indexed annuities were designed in 1995 to compete with CD returns. They are not market products, even though that’s how most agents sell them.
Licensing Qualifications to Sell Variable Annuities Are More Rigorous Than for Indexed Annuities
The fact that variable annuities are a security and are sold by prospectus requires that the selling agent has a higher licensing standard than someone selling an indexed annuity. That’s one of the main arguments concerning people that only sell indexed annuities. The licensing qualifications are only a state life insurance license, which is not hard to get and not challenging from an intellectual standpoint. To sell a variable annuity, you have to pass some pretty challenging exams, and the ongoing continuing education requirements are unmatched when compared to the indexed annuity licensing requirement.
So for now, variable annuities are sold by prospectus and indexed annuities are not, but that might change in the near future.