# A Look at an Equity-Indexed Annuity

After writing yesterday’s post on seminars, I decided to build a spreadsheet to analyze an equity-indexed annuity similar to the one my dad told me about. Now, it is important to note that there are LOTS of varaibles involved with annuities (particularly equity-indexed annuities). My illustration assumes something called a one year point-to-point, meaning that the account value is based on the performance of the index over a one year period. Other EIAs might have a monthly point-to-point.

1. The annual EIA growth is capped at 10%, with a 100% participation rate. This means that the annuity holder gets 100% of anything up to 10% rate of return. So, if the annuity returns 7% one year, you get 7%. If it returns 12%, you get 10% due to the cap. I’m almost certain that my assumption favors the EIA.

2. I assumed that the guarantee was no loss of principal. So, if the index returned -5%, the account had a 0% rate of return for that year.

3. I used the S&P 500 Index total returns for 1950 – 2006 as my foundation for the illustration. For comparison’s sake with the EIA, I assumed an account that earned the S&P 500 Index’s return minus a 1.50% management fee. I also did not include any fees on the EIA, which again favors the annuity.

4. I left out taxes completely. We’ll assume that the non-annuity account is held in an IRA.

I have asked my dad to get a copy of the annuity’s prospectus. Once I get that, I’ll do an even more detailed analysis and post about it later.

Click to see larger image

Okay, here are the results I found after running my numbers:

The hypothetical growth of a \$1,000 investment in 1950 in the EIA would have grown to \$42,670, for an average annual rate of return of 6.81%. The non-annuity account would have grown to \$292,674 over the same period—an average annual rate of return of 10.48%. So the “stability” of the EIA cost \$250,000! OUCH!

Why is the EIA’s performance so pathetic? Here’s why:

1. The EIA’s annual return is capped at 10%. Over the 57-year period in the example, 34 years (59.6% of the time) had returns greater than 10%. Each of those 34 years, the rate of return was capped at 10%.

2. Over that same period, only 13 years had negative returns. In other words, the guarantee didn’t really help out that much. Oh, and remember that there were no fees taken out of the EIA. So, you may not have lost money that particular year, but you would have still had to pay your fees.

I would stay away from this EIA! I bet you the presenter of the seminar my dad went to did not go into this much detail!

Like I said, this is only an example to illustrate the EIA concept. There are many different kinds of EIAs (some are better than others) with many different “features.” Trying to sort through all the details is very confusing and nearly impossible to do a side-by-side comparison.

Note to any EIA salespeople: If I have misrepresented the EIA, please let me know (nicely). It is my goal to educate, not misrepresent.

UPDATE: Here are some follow-up posts on this topic. Please read them before you leave any comments.

My Response to a Comment on My Equity-Indexed Annuity Post

Another Follow-up on Equity-Indexed Annuities

## 130 thoughts on “A Look at an Equity-Indexed Annuity”

1. Dylan says:

@ Steve – No thanks on your challenge.

You are apparently under the mistaken impression that we do the same thing and just choose to charge for it differently. And, Iâ€™m not sure how you draw the conclusion that I charge based on a percentage of someoneâ€™s investments or that I am opposed to those who earn commissions. Neither of which are true. I only mentioned my situation to rebut your implication that I was â€œenslaved to either commissions, or by their supervisor, or maybe to lack of knowledge.â€

2. Steve Hansen says:

Mutual Funds, UITs, CDs, Single Premium Immediate Annuities, Fixed Indexed Annuities, Life Insurance, LTC insurance are all tools used correctly can help used incorrectly can cause distress.

No one tool is the “Swiss Army Knife” of investments. Fixed Index Annuities are like any other investment some good, some bad, most average.

For JLP if your father was put into an inappropriate investment shame on the advisor that did it.

Benefits of a good Fixed Index Annuity.

1) Most offer 10% free withdrawals
2) Are liquid/have waiver of penalties at death, terminal illness and Long-Term Care Confinement.
3) Most have a what I refer to as a lock in look back feature meaning if the index that is being linked goes down the account value is locked in and gains in the next year are tracked from the new lower index point.
4) Many have 1 by 10, 5 by 10, annuitiziation features. Which means for instance that if you hold the annuity for five years you can take all of the money by annuitizing for a 5 year period.

I see fixed index annuities as option to those that do not want market risk but would not be happy with today’s CD rates.

A last comment on the often referred to high commissions on fixed products compared to commissions or fees on market products.

Assuming a fee of 1.0% on \$100,000 investment and not accounting for any growth of the account the total fee based compensation to the advisor would be \$10,000. Assuming a fixed product with a one time commission of 8.5% total compensation would be \$8,500 or .85%/year.

There is too much your bad, I’m good out there too much misinformation about many financial products.

Hopefully most of the “Pros” that are posting to this site are not “One Horse Ponies” like a golfer we have a bag fool of clubs, each club designed for a specific purpose. Before my own research I seldom used a Fixed Index Annuity in my practice, similarly I rarely used a hybrid club that my brother-in-law gave me. Once I understood it’s purpose for certain specialty shots, I now love the club. The same with the FIA, it’s a terrific tool when used correctly.

One last item of information…last week the Securities Exchange Commission has put out notice that it plans to have all index annuities filed as securities. The process, if it comes to completion will take about 18 months at a minimum. As far as I’m concerned the sooner the better, I feel it will take this tool out of the hands of a lot of insurance agents that don’t explain it correctly, use it incorrectly, etc.

I wonder…If the index annuity is indeed declared a security, will it then be accepted as another viable financial tool the so many brokers hate???

Good Luck

God Bless

Steve Hansen

3. Don says:

Just to inject myself quickly into this great discussion; the SEC on July 1, 2008, issued Release No. 33-8933 to propose a rule change to the Securities Act of 1933 and Securities Exchange Act of 1934 by creating SEC Rules 151A and 12h-7, effectively classifying indexed annuities as securities, subject to the registration, prospectus delivery, and anti-manipulation (Rule 10b-5) standards of the SEC and as well as the market and business conduct codes of FINRA.

This change has been on the horizon for at least a decade and even a casual observer could see that the insurance industry’s “ostrich-head-in-the-sand” approach to addressing rising sales practice abuses and their collective failure to provide adequate training and resources to both the public and intermediaries who sell indexed annuities (in particular equity-indexed annuities)led to this position by the SEC and securities regulatory community. These proposed rules will pass the September 10, 2008 comment period fairly unchanged and become the law of the land by November 2009 (a copy of the proposed rule can be found at http://www.sec.gov/rules/proposed/2008/33-8933.pdf).

The issue I have had with equity-index annuities is not their purpose but rather how they have been sold and represented. They provide a valuable hedge for those truly risk-adverse individuals who seek controlled participation in the market (for a price), have liquidity needs beyond the contract’s surrender period, and understand the opportunity cost vis-a-vis other savings vehicles which may be available to them — in other words, suitability, suitability, suitability. I defy many of you to find two salespersons who offer these products to their clients to explain the various features (i.e. point to point versus monthly point-to-point indexing, high and low water marks, European versus Asian style crediting, etc.) in a way that makes sense and is not confusing to the consumer. In my experience, I have found commissions, not the client’s interests, as a motivator for the sale of these products and without the proper objective an unbiased view (certainly one that is not clouded by money), the astronomical growth in EIA sales as a subset of all fixed traditional annuity sales (roughly 30% of all sales for the period 2001-2007 with sales in 2003 of \$14 billion topping total sales for the period 1995-1999) only invited the increased regulatory attention.

The proposed rules make NASD NTM 05-50 look like a walk in the park and the industry has no one to blame but their own greed and carelessness.

4. Sandy says:

Hi all,
The information was educational…….. Thanx JLP, I have one query. Its is easy to get a return out of historical market performance, is there any tool to predict the future EIA based on past data basically for retirement planners

Regards,
Sandy

5. john says:

could somebody please tell me if there are any annuitys tied to t-bils only and would that be a good thing, thanks

6. PHIL says:

Oh and to John there are so many annuities out there that are linked/i hate that word because they are not actually linked at all they just use the numbers from the various bonds that the insurance carriers purchases,but i do know of one carrier off the top of my head that uses treasury bonds…try Lincoln Benefit life,its a Allstate company.

I have to say one more thing we as insurance agents/advisor’s get a commission for the account we set up ranging from 1% to 10% and rightfully so…..think about the broker getting his money weather you make or lose money not to mention all the fees along the way and taxes….we are safe money people they are risk takers….im not about to have a 60 to 80 year come in my office and put them in a mutual fund or variable annuity.Look where the market is today,i can look at all my clients and assure them they are safe,annuities have never lost a penny,unless the client didnt live up to his contract just like if he didnt with a CD.

7. PHIL says:

Just find someone you trust!!!

8. PHIL says:

I GUESS YOU GUYS THAT THINK EIA’S ARE BAD SHOULD TALK WITH MY CLIENTS I HAVE MADE THEM A LOT MORE MONEY WITH THEM THAN THEY WERE MAKING WITH THEIR OTHER BROKERAGE ACCOUNTS THEY WERE LOSING THEIR ASS,I HAVE MADE PEOPLE 18% THE FIRST YEAR OTHER 16.5%…….BUT THEY HAD ALREADY LOST 30% IN THE MARKET IN JUST 3 MONTHS HAVING LESS THAN THEY STARTED WITH,YA’LL ARE THE SCUM BAGS COMMISSION AND HIDDEN FEES TRYING TO MAKE AGENT LOOK BAD.IM A SAVIOR IN THEIR MINDS.THE WAY I LOOK AT IT THEY MAKE MONEY I MAKE MONEY…WITH YOU BROKERS THEY MAKE MONEY THEY LOSE MONEY YOU ALWAYS MAKE MONEY WEATHER THEY WIN OR LOSE.

9. Denny says:

I have read through the posts with interest and it seems that there are two sides to this discussion.

On the right are the â€œAnnuity Salespeopleâ€ who are only in the business to make unbelievably obscene amounts of money ripping off seniors by selling them those despicable annuities (especially the â€œIndexâ€ type). And on the Left are the â€œFinancial Advisorsâ€ (some even â€œCertifiedâ€) who are only in the business to â€œhelp peopleâ€ (not for the money) by using software to track what has happened in the past 50 years and have much better ways for people that have no risk tolerance, short time horizons and know nothing about investing,â€¦to invest.

So to all of you that fall in either groupe here’s a question: If a prospective client said this to you…what would you recomend?

Hi Iâ€™m 69. I have this money still in my company 401k that I need to last for my retirement

I have watched my retirement account make money for everyone but me for the last 10 years. My mutual Fund has been charging me fees each year even when I lose money or they sell losing stocks in my account. In fact since I retired I have seen my account drop 10% in value.

I donâ€™t know anything about investing and according to what I have seen in the last week neither does anyone else.

I want to do a little better than I can in CDâ€™s which I like because they are safe.

I want the money to last me for the rest of my life

I want my kids to receive what ever is left without having to go through probate.

From the post above think this is what most of the greedy “Annuity Salespeople” might say:

Annuities are a save place to keep your money.
You can not lose your principle because it is guaranteed.
You do not need to know anything about investing.
They can do better than your CDâ€™s.
They can pay a minimum interest each year for up to seven or ten years as long as you agree to leave your money in the account for that period of time before you move it.
You can annuitize them and not outlive the income
They by pass probate.

Without giving up any of the above features if you are willing to take the chance that you will receive no interest in a particular year you can also have the option of receive better than the minimum interest in others years.

If you are willing to agree to leave your money in this annuity for seven to 10 years you could also receive an immediate bonus to your account which might help make up for some of the losses your account has experienced.

If this sounds like something that might be interesting to you let me tell you the negatives of these annuities.

What would the “Financial Advisors” say? As I have been i(in the past) a registered rep here’s what I believe the securities people would say:

What would the “Financial Advisors” say? As I have been (in the past) a registered rep here’s what I believe the securities people would say.

I do not have guaranteed products.
You can lose some or all of your investment.

It is your responsibility to make the investment decisions.

Unless your investment is in an IRA type of account you will pay taxes on the profit each year.

We will charge you an annual fee each year based on the value of the account.

We will charge you a sales fee any time you put more money in the account.

We will charge you a sales fee every time we sell some of the account.

Over the last 10 years, the inflation adjusted return on the S&P 500 was -17%.

If you reinvest your dividends itâ€™s better; the inflation-adjusted return was only -2%.

Any Thoughts?

10. Dan says:

Hi, I ran across this page today when looking for annuity information suitable for a layman. Very informative posts and I found what I was looking for.

In response to Denny’s post in October, I believe in the KISS principle where in my parent’s situation, they have half of their bulk in GNMA’s for security and interest. The other half is normally in the total market index for growth. At the beginning of the year due to abnormal times, they went to 75% GNMA’s and are quite pleased.

They re-balance the portfolio once a year.

They do have a stock portfolio with quality stocks paying dividends, some individual bond issues as well.

I think that is one of the more sensible ways of managing risk and expense.

Dan

11. Randall says:

Hello,

I am an uninformed individual who has seen my small investment get smaller & smaller. the other day I sat in on a presentation of the Allianz MasterDex10 annuity. Here is what was preswnted:
1. We would receive a 10% bonus DAY 1 of our investment. With an additional 12% bonus at the end of year 1.

2. Any additional anounts added in years 2 & 3 will receive a 12% bonus ane the end of those respective years.

3. Now the really good part. The initial investment will DOUBLE at the end of year 8.

This assumes that no funds are taken out during the term of the annuity. Sounds too good to be true right? The brochure lists the following penelties for withdrawal during the contract period as follows starting with year 1:
10%, 10%, 10%, 8.75%, 7.5%, 6.25%, 5%, 3.75%, 2.5%, 1.25%, 0%

We were told that some sort of trust should be set up.

I just read your forum and the agent is comming back today. I know this is real short notice, but I would appreciate knowing what questions I should ask?

Thank you,

Randall

12. Blair says:

I guess all you stockbokers have a NEW expanation for the CRAZy Loses you have given all your clients .. at least all my Incesc annuities still have al he gains and evry penny of he principal

13. Mark Jonh Crews says:

My clients EIAs have yet to loss a penny. And in mid 2007 several posted 15-19% gains (not bonuses) actual gains. Most are averaging 6-8% over the life of the contract. with no worries or losses. That's what seniors want. A decent return and no losses. And no taxes on SS each year. Yes, there are taxes to be paid on the growth when it is taken out or matures.
I am soo looking forward to the steady rise in the indexes. while any senior with 100k in the market last year will have to wait 6-7 years to recover and show a balance over 100k again, my clients could easily be at 150k to 175k.
Until you actually have 5-7million of EIA business on the books over the last 7-9 years and actually seen how EIA really work, you should be careful of what you post. As the advisor, you do have to understand the crediting and pick products that will perform correctly. But they actually can be a very positive experience for a client.

14. Tom says:

What a crock, you do not understand the use of an EIA. I too have clients who have lost a lot of money in the market and then died leaving their kids a lot less. Had that money been in a good EIA they would still have at least their principle and the quaranteed interest. Many of my clients who are older want little to no risk with “some” growth potential. Many of my clients market money is still the same as it was in the early 2000`s. Shame on you saying most agents who work with the older clients are sleasy. You want sleasy?. Lets talk about the broker who forgets to tell a client when the market goes down 50%, it does not get back to the same level when the market goes back up 50%.. Lets talk about the broker who tells older people to “hang in there” it will come back, when in fact they have no idea if or when it will come back in that older persons remaining life span.
Lets talk about a broker who is willing to put a 75 year olds life savings at risk.
Shame on you.

16. Craig says:

Hi, have you looked at the BPA Select annuity – it is the best performing FIA in the business and the guarentees are tremendous. 5% Income Rider and 8% death benefit compounded annully. Have a look and let me know how you think it stacks up.

17. Craig says:

Randall, Allianz MasterDex is a terrible product – take a look at the BPA Select I’m sure you’ll see why I think the Allianz product is terrible

18. Well first of all most of what is biased both ways. First lets talk about the person buying the index annuity. Is that person really looking to get returns in the market? or are the not happy with the current fix rates in various bank and credit union products. Are they looking at non qualified funds (tax deferral). And most good quality index annuities are 100% part and lets just use a 8% cap. The fact is you cant compare it to any straight index since it is not in the market. How you earn your interest is based on it, for those who want gains of the market shouldn’t use a index annuity but those who are looking to get a better return on their money than lets say cd and saving accounts its a viable solution. An lets not forget the emotional part which we all forget that the average investor has. Did the investor in the index over all those years really stay in the market or did he do what most do and bail out at the worst and get back in “when the market is doing better and buy back in at a higher share price. I think you are comparing apple and oranges and it really depends what dad is looking for. He might be conservative and you are younger and having him go for the gusto. Oh and never ever use a bonus product as an advisor for 13 years the last time I checked an insurance company never gives any thing for nothing. Its a way for a salesperson to hook a person and true advisors should use one unless in a very very few instances. Hey there are very good quality companies that offer 6.15% for a 4 yr product point to point no bells and whistles oh and A+ rating and lets face it would you lock your money in a long term fix or cd paying less than 3.6 – 4.0 for 7-10 years. Index annuities have there place just like a index fund, mutual funds, fix annuities, money markets cd and bonds i bonds and etc

19. oh also index annuities dont have a set fee like a va or fund. Its based on the difference of the insurance companies general fund performance and what it cost to buy the option on that index for the cap rate.

20. paul says:

Facts are stubborn things.The worst EIA product I have seen was better than the uninsured index over the last decade .This is what counts to our clients.We have 35 years of money management experience and anyone who uses a 100 year perspective or a 50 year perpective to plan investments for a 70 year old is being either criminally stupid or disengenuous.Biased writers,new outlets,amateurs , like this blog anbd other media have harmed many many investors by disouraging them from buying a safe reasonable vehicle like an EIA as part of their overall asset allocation.PS we manage nearly 1 billion dollars and our EIA clients are the happiest of the last 10 years.

21. Chris says:

The analysis is flawed. By the same logic nobody should be in bonds or in money market accounts. After all the S&P was better over the past 60 years, right? You have to look at risk as well as return. EIAs have lower expected returns than pure stock but also lower risk.

That being said, I think EIA commission rates are too high.

22. Scott says:

You did a lot of work here. However, Chris is right. The analysis is flawed. Also, as the author stated, there are way better FIA’s out there. There are several that use month to month caps with a cap of 2.6% per month, which could potentially allow you to capture up to 31.2% of the S&P return in a year max. So this analysis on this annuity is somewhat accurate, but I would caution people, especially retirees, do not use this analysis to make your retirement investments solutions because taking income in retirement is more about the sequence of returns than the average return over time. How would you like to have retired in 2006 or 2007 and put your \$1M into the S&P 500 index? You’d be down to about \$746,000 right now in August 2010. If you put it into an equity indexed annuity, you’d have a minimum of \$1,000,000, and more likely you’d have about \$1,200,000 today. So you do the math. Remember, it’s about the sequence of your returns, not your returns over a 60 year period. After all, hate to break the news to you, but if you’re in your 60’s now, you probably won’t be around in 60 years to let the sequence of returns even out.

23. Scott says:

Hey Stanley More CFP…..What’s that 10-yr treasury paying now? You still selling that to your clients? I bet not.

24. Scott,

How much do you get paid when you sell someone an EIA?

25. David says:

Looks like I’m a little late to the party. But, better late than never I suppose.

I see your comparison. I am not a champion of EIAs. But, I think your analysis is very seriously flawed.

1) You don’t specify what the “non-annuity” account is other than an IRA investment. But, you started the analysis in 1950. IRAs weren’t introduced until 1974. If you’re going to compare the “reality” of an EIA, don’t compare it to puff the magic dragon.

2) Why did you choose 1950? Why not 1974? Why not 1900? You’ll get wildly different results when you change the date. Seems like cherry picking to me.

3) You compounded the return. Stock returns are NOT compounded unless you invest in dividend stocks, and then you need to know the capital gains rates for the appropriate years because it WILL affect the return (assuming you’re not cheating and showing a return that you could never have gotten in an IRA in 1950 to 1974). Also, index mutual funds didn’t really exist until the 1970s either so that’s out as an investment assumption until then. That kills your 11+% compound return assumption.

4) You really are comparing apples to oranges. The types of people investing in EIAs have different goals than people who invest in the stock market.

It seems as though you set out to prove that the EIA is a piece of crap instead of setting out to analyze which investment would have produced more money over the long-term. What you ended up with is a misleading analysis.

26. David wrote:

“Why did you choose 1950? Why not 1974? Why not 1900? Youâ€™ll get wildly different results when you change the date. Seems like cherry picking to me.”

This was a follow-up post to the previous day’s post, which you can read here. I got the start date from the ANNUITY SALESMAN who conducted the seminar! I assure you there was no attempt to cherry pick.

Finally, if comparing an EIA that’s BASED on the S&P 500 Index can’t be compared with that index, then what can it be compared with. Did you not read my assumptions which favored the EIA?

I don’t appreciate the accusatory tone in your comment. I can assure you that had the EIA come out on top, I would have printed that.

27. David says:

JLP,

I’ve seen some really bad annuity presentations. I think my accusation is proper. You are comparing apples to oranges.

It is cherry picking regardless of how you look at it. Annuity salesmen do it, but so do those on the other side of the fence. You used the salesman’s data, but assumed his premise was correct to begin with. I don’t think it is.

I’m not saying that the EIA should have won. I think an analysis of an EIA going back to 1950 is not realistic and neither is assuming an IRA return or compounded returns from that time period either. It’s not realistic because they didn’t exist.

You didn’t really favor an EIA. Any annuity I’ve looked at with a cap doesn’t have a fee on top of that. They use spreads (fees) when there is no cap. The other point you brought up about locking in investment principal isn’t really favoring EIAs either. They are designed to protect investment gain plus principal. You’re just illustrating how EIAs work. But, on the stock market side, you weren’t demonstrating how stock returns work. You were demonstrating how a hypothetical compounding investment (stocks don’t earn compounding returns unless they are dividend stocks and even then not all of the return is compounding) that also gets all of the gains and losses of the stock market works.

To say that EIAs are based on the S&P is sort of true, but doesn’t tell the whole story. They are handicapped on purpose. The product derives some of its interest from the S&P. It used bonds and index call options to generate the returns. Obviously no dividends are paid. The cap rates you seem to understand. Sometimes there is a fee, but not when there is also a cap.

…and when I say you are comparing apples to oranges, you are comparing the stock market with dividend returns and 100% compounding tax-free vs a product that tracks just the upward movement of an index. That doesn’t mean you can’t compare them. It just means that you have to understand that there is necessarily going to be a difference in the return potential. You put Ali in the ring with the kid in the golden gloves and then when Ali won you said “stay away from the EIA.”

That’s not “apples to apples.” Apples to apples would be “Look at this corporate bond. Look at this other corporate bond. Which one pays more?”

If the purpose of the comparison was to say “well, if an IRA and index mutual funds existed in 1950, they would have beaten an indexed annuity if it had also existed.” my question would be “how can you possibly know that?” When you have money flowing to different investments, it affects how people invest in them, how those assets are priced, and the fees generated and so on (i.e. supply and demand drives asset pricing and affects returns on the secondary market where these assets are bought and sold). But, there’s no way to go back in time, invent either hypo investment or assumption and then sit back and watch who comes out on top.

I think the best you could have done is said the EIA salesman is wrong, the only analysis that can be done is from the time EIAs were first introduced until now. How does it compare to the stock market returns during the same time period? That would be a historical comparison. It still wouldn’t be apples to apples, but it would compare how EIAs perform as versus a direct investment in a stock index.

28. David,

Let me ask you this: do you earn commissions from EIA sales? If so, please share with us how much you make on a typical sale and also tell us how that compares to a mutual fund sale.

I did not cherry pick. Cherry picking would have occurred had I chosen a date that backed up my point of view. I did not do that. I used the date that the annuity salesman used.

HOW can you say I didn’t favor the EIA? I didn’t deduct fees and expenses and I took out 1.50% for fees on the S&P 500 Index. The EIA was HEAVILY favored in this example.

I understand why insurance agents don’t like me comparing an S&P 500-based EIA with the S&P 500 Index. But, if they don’t like those comparisons then they shouldn’t be selling the product because you can bet that they are using the S&P 500’s underlying numbers to make their sales pitch.

29. JLP,

>>>do you earn commissions from EIA sales?<<<

For the record, no. But, I'd like to add that this is totally irrelevant to the discussion (a red herring).

I used to sell them. I also have experience selling mutual funds, which I also don't do anymore.

EIA commissions run the gamut. Some commissions I've seen go upwards of 7 percent on the first year (called FYC or "first year commissions"). Some states, like NY (where I am from) cap commissions at 5 percent (or at least they did when I was selling). The commission is on the deposit in the contract. But, no money is deducted from the annuity account to pay commissions. The insurer uses surrender charges on the annuity to make up for the commissions but those fees are only charged if the client cancels the contract within the surrender period. Usually, there are no other commissions paid out after that first year.

Mutual funds vary too depending on the class share you sell. It really depends on whether you get an upfront commission plus trails or just trails. You could get 5 percent up front on money invested in mutual funds and then earn trailing fees on top of that. Maybe .25 percent annually whether we did anything or not. Maybe .5 percent. As long as the client was still a client, we made money.

RE: Cherry Picking–OK, then the salesman cherry picked his data (rather poorly at that, I think), but, you used the same data. My only point with that is that the date ranges are completely and totally arbitrary. There's no objective reason to analyze returns from 1950 until today.

I don't think the EIA was overly favored in this example. You didn't deduct fees because there are no fees to deduct. I think you're confused on how EIAs charge fees. There are no fees and expenses for an EIA unless the insurer charges a spread. They only charge a spread when there is no cap. Now that you're on it, you also assumed a flat cap rate. Those things go up and down with the price of options contract fees and the cost to hedge. So, in good times, you'll see those cap rates rise. That's hard to predict so I won't go on about that too much. 1.5% fee on the mutual fund seems high for an index fund, so I'll give you credit for that.

But, you DID favor your S&P assumption VERY heavily. You compounded the return every year on every dollar invested. What mutual fund does this? None that I know of. What stock investment earns compounded interest? None that I know of. But then, I've already brought this issue up to you. You measure only dividends when compounding returns, and even then, you're simply buying more shares in that year for more price appreciation. If you're not earning dividends, then you're not compounding. You should be measuring the total return if you're looking at stocks.

Yes, I agree EIA salesmen shouldn't be comparing the S&P500 to an EIA. I understand the appeal of doing sales pitches that way. Heck, even the insurance companies say "earn the upside of the stock market without any of the downside risks" I've said that myself before, but with several caveats. You have to explain that there are caps on these things, that those cap rates change, and that you don't earn dividends and….and…and…

Far too often, I think what's being sold is the idea that you can have your cake and eat it too, and that's just ridiculous as well as a contradiction in terms. EIAs do exactly what the contract says it will do. But it's not a miracle investment product.