InvestmentNews reports that insurers are concocting annuity contracts “that use structured products to buffer clients’ account values against downside losses.” Protection of investment principal against downside losses is certainly attractive to investors – especially retirees and seniors – but at what cost and do these products really protect principal?
First, it is worth noting that the average investor cannot possibly discern the prices or values of these products without expert valuation models. The insurers themselves have to use these valuation models to calculate their obligation to the annuity holder. The price or value of the product is not quoted in the paper or through exchanges, and there are no available price references. You would have to consult an expert in finance to discern the true prices of the structured products and determine whether or not you are paying too much for principal protection, or not protecting all of your principal. Second, the products are extremely complex. Your agent may not be adequately trained in complex derivatives and structured products, or their valuations.
Even some banks appear to recognize that the products are too complex for the market. The InvestmentNews article noted that Wells Fargo Advisors does not carry these annuities “largely because of the complexity that comes with combining an annuity with structured products.”