Advice Pool - Finance

Anyone who’s been fishing knows that one of the keys to catching the big one is having the right kind of bait. Many in the financial services industry understand this truth all to well and they’ve come up with the perfect enticeme

According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product

nt to hook unsuspecting investors. It’s called the equity-indexed annuity (EIA) and chances are, if you’ve visited a traditional advisor recently, you’ve heard its compelling pitch.

Of course, for bait to be effective, it has to

; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.

Examples of combination products may in

be something the intended target will happily swallow. Insurance companies have created a wonderful presentation that uses smoke and mirrors to give investors the impression that equity-indexed annuities are the answer to all thei

lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.

financial problems. But the reality doesn’t live up to the promises.

The marketers of financial products know that one thing older investors want is simplicity. Seniors don’t want to have to wade through a lengthy sales pitch or

here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe

be overwhelmed by financial techno-babble. Salespeople know if they can offer an apparently simple solution to investors, their chances of making the sale are greatly increased.

Equity-indexed annuities are presented as being a

d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.

Combination pro

imple way to have risk-free growth of your nest egg. They promise a guaranteed minimum return, while keeping the growth potential of the market. They promise that you can’t lose any money and many even sweeten the pot with first y

ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc

ear bonuses and riders that allow you to access your money for nursing home care and other early withdrawals. It all sounds so good and it’s so simple. But is it, really?

The answer is no. Equity-indexed annuities are actually ve

easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi

y complicated.

Let’s take a closer look at how complicated equity-indexed annuities really are by starting with their chief claim, the guaranteed minimum return. Most investors have the impression that on a year-to-year basis the

nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically

y receive the guaranteed minimum return or the market return, whichever is higher.

But that’s not true. You either get the indexed return or guaranteed minimum return for the life of the contract, whichever is greater. So if it’s

and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ

a 15 year contract, at the end of the 15 years, the insurance company looks back and figures whether you’d have earned more, at the guaranteed rate or the market return for the entire 15 years. So suddenly the guaranteed minimum i

ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi

sn’t too impressive.

To make matters more confusing, on some contracts you don’t get the guaranteed minimum return on all of the money you put in. For instance, some pay a 3% guaranteed minimum return on just 80% of your initial

ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.

Following aspects would a

investment. So in essence, you’re really guaranteed only 2.4%. That doesn’t sound as good, does it? When the list average on a short term Certificate of Deposit is around 5%, why would you want to lock in a 2.4% rate for 15 years?

dd to the challenges in developing combination products:

Which markets to tap where the combination products can do fairly well?
Which combination prod

How the index return is calculated is much more complicated. You’d think that the insurance company would just tie your market return to an established index, like the S&P 500, and mirror its return. Unfortunately, it’s not that

cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin

simple. There are over 40 different methods in which these rates are determined and they vary widely from company to company. The explanations for these calculations are so complex, there’s no way the average consumer could even h

tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen

pe to understand them. Even professionals find these methods extremely confusing.

Even if you could understand how your index return is calculated, it doesn’t matter because the insurance companies can change how they calculate i

t?

As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel

t from year to year. They can also modify the maximums, minimums, participation rates, asset fees, other charges at their own discretion. And there’s nothing you can do about it.

Why would insurance companies do this? That part i

ping new procedures for reviewing their safety, efficacy and quality.

Professional from academic institutions, pharmaceutical industries, health care indust

very simple. Insurance companies understand the importance of keeping their flexibility and control, because they know that the markets and interest rate environments can change dramatically over the life of your contract. They p

y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products

ut these safety valves in place so they make sure they make a profit. Of course, that can reduce how much you make.

If insurance companies put a high priority on maintaining their flexibility and control, shouldn’t you? Be smart

.

As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de

nd don’t take the bait purveyors of equity-indexed annuities are offering. Use your head and don’t get sucked into a deal that, like many others, you may soon live to regret.

Mr. Voudrie is a Certified Financial Planner, national

elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.

Companies that provide selfless information through particip

ly syndicated newspaper columnist and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN. He can be reached at jeff@guardingyourwealth.com

tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products

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