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Life insurance, annuities, and the proprietary index: What to ask before you’re sold

March 22, 2024 / 5 min read

If you plan to rely on life insurance or annuities for future income, you may have been offered a “proprietary index” product. Uncover potential pitfalls with this new investment option with a few simple questions.

There’s a saying in the financial services industry: annuities and permanent life insurance aren’t generally bought — they’re sold. That’s especially true with insurance and annuity products tied to proprietary index investments. We share some questions you should ask anyone trying to sell you a product tied to a proprietary index. But first, some background on why this matters.

Annuities, permanent life insurance, and stock market indices

An important consideration when evaluating an annuity or life insurance product is the type of investment the asset manager relies on to create long-term growth. After all, it may be why you’re considering products like annuities or universal life insurance in the first place — for your own retirement income, for cash value, or for your family’s financial needs after you’re gone.

For decades, asset managers invested in funds tied to stock indices such as the S&P 500 because they had a proven track record of performance that made them attractive to long-term institutional investors like banks and insurance companies. But in the past 10 years, banks and other asset managers have launched life insurance products and annuities with investments connected to proprietary indices.


Unfortunately and unsurprisingly, because proprietary indices are just that — proprietary — the lack of transparency means they’re typically complex for those who purchase the product and select them as investments. For example, the asset managers know how equities are chosen for each index, the kinds of companies that are included in the index, and how the indices may be weighted, among other things. But it’s difficult for others to understand those factors.

Why is this a problem? Because there’s so little real-world performance data to rely on versus the old-school indices, investors must place an incredible amount of trust in the institution and its asset management team to deliver returns that will rival older standards like the Russell 2000 or the S&P 500.

In fact, given that there’s so little historical data available, marketers of these proprietary indices choose to create attractive but theoretical illustrations of performance instead. To accomplish this, they “back-test” the index versus prior years’ historical stock market data to see how their index  would have performed had it existed. You may be told you can’t lose because the worst-case performance result is still attractive. But in 2022 and 2023, that wasn’t the case — and that was a rude awakening for investors who chose these new, proprietary indices.

Back-tested performance isn’t real. It’s hypothetical, and what’s more, it’s based on an investment portfolio you can’t examine. It’s easy to pick winners and losers in hindsight, especially if your stock picks are undisclosed and your methods are proprietary. Perhaps that’s why proprietary indices commonly illustrate attractive theoretical back-tested performance results that equal — or exceed — the actual historical performance of proven market indices. But the fact is, given their complexity, it’s very difficult to predict which ones will do well and those that won’t.

Trusting the hypothetical

In contrast, investors in traditional index funds don’t have to trust the hypothetical projections of a nameless, faceless marketer — they simply examine the publicly reported performance and composition of the old-school index in which they’ve invested. Institutional investors have confidence in funds tied to common indices like the S&P 500 and Nasdaq Composite in part because they’re transparent. Discover for yourself: a simple Google search for “top stock market indices” reveals how stocks are chosen for each index, how they’re weighted (generally, by market cap), the individual equities in each index, and decades of performance data.

Marketing versus reality

Permanent life insurance and annuities are designed to build cash value over time. It may be that one or both products are right for you, but you’ll never know without getting answers to a few important questions. On the merits of selecting a proprietary index annuity or permanent life insurance policy from an insurer invested in a proprietary index, we suggest you get these questions answered before you risk future returns:

Buying versus being sold

Even if you know an annuity or a permanent life insurance policy is right for you, it’s important your specific product choice is driven by facts, data, and perhaps the objective recommendation of an independent advisor so you’re truly buying the policy you want and need.

The material contained in the commentary is for informational purpose only and is not intended to provide specific advice or recommendations for any individual nor does it take into account the particular investment objectives, financial situation or needs of individual investors. The information provided has been derived from sources believed to be reliable, but is not guaranteed as to the accuracy and does not purport to be a complete analysis of the material discussed. It does not constitute an offer or a solicitation of an offer to buy any securities, products or services mentioned. The opinions expressed do not necessarily reflect those of the author and are subject to change without notice. Past performance is not indicative of future results. The Standard & Poor's (S&P) 500 Index is an unmanaged index that tracks the performance of 500 widely held, large-capitalization U.S. stocks. Indices are not managed and do not incur fees or expenses. It is not possible to invest directly in an index. Any tax advice contained herein is of a general nature. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This is being provided solely as an incidental service to our business as (insurance professionals, financial planner, investment advisor, securities broker.)

Securities are offered through Valmark Securities, Inc. member FINRA and SIPC, an unaffiliated securities broker-dealer.

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