Subject: File No. S7-22-97 Equity Indexed Annuities and Life Insuranc Author: Chris Kite at Internet Date: 10/28/97 10:50 AM This last week's market decline is a good example of why equity indexed products do not need to be regulated by the SEC. These products do not have the downside risk found in SEC regulated investments. A guaranteed crediting rate of 2% to 3% is the key to making these insurance products different than SEC regulated investments. Insurance companies who market these products should show that these products do not have the downside risk nor all the upside potential of investing in an index such as the S&P 500. SEC regulation might actually increase the chance that agents and consumers mistakenly view the product as an investment in an index. Companies need to educate people as to what makes these insurance products different than investments. Non-registered equity indexed products should not be marketed as an investment. Even so, these products do have a similar need for financial growth. For both permanent life insurance and annuities, growth of the account value is the key to providing long term security. These products protect against the income risk of living a long life. They are complements to term oriented life insurance products which protect against the financial risk of dying early. Investment products have the potential to provide greater long term growth, but these additional returns come with greater risks and volatility. An investment alternative to an equity indexed insurance product would be an asset allocation mix of bond and stock funds. Analysts have suggested a 30% to 50% allocation toward stocks. These allocations may achieve similar long term growth within a conservative risk tolerance, but would still not have the guarantees provided by the insurance products. Insurance companies also strengthen the distinct role of their insurance products by emphasizing and enhancing the lifetime income options. By converting the account value or death benefit into a lifetime income, the product protects the beneficiary from the risk of outliving his or her income. These products also provide protection, similar to term insurance, against the mortality risk of early death. With annuities, this type of insurance protection may be minimal. With many equity indexed life products, this protection is often substantial and may be more significant than the long term protection via account value growth. Many equity indexed annuities have a 10% load which effectively reduces the guarantees. It is often tied to sales and administrative expenses for setting up the annuity. Since the annuity is typically intended to be kept for at least five years, this load is, in effect, a surrender charge for early withdrawal. Over the long term, this load may make a 3% guarantee equivalent to about 2%. As a final note I would mention that the insurance market has a much bigger issue to face regarding suitable risks and disclosure for consumers. Insurance products introduced in the 1980's allow great flexibility in mixing term components with cash value components. These options are very useful when they are appropriately managed. However, as people move into retirement, many policies will carry more insurance risk than is appropriate or supportable. These insurance costs can consume more of a retiree's policy account value than a prolonged bear market.