Are Equity-Indexed Annuities Right for You?
What is an equity-indexed annuity?
An equity-indexed annuity is a kind of contract between you and an insurance carrier. This annuity earns interest by linking to a given index. One of the most commonly used indices is the Standard & Poors 500 Composite Stock Price Index (the S&P 500).
Competitive interest rate guarantees on rule:
Some equity indexed annuities are able to offer as much as a 10% interest bonus the first year. In addition, the insurance carrier typically guarantees a minimum return on your rule contribution amount over the life of the contract. This rate is guaranteed already if the index-connected rate is lower. Guaranteed minimum return rates vary from carrier to carrier, but theyre typically in the range of 1-3%.
Heres how you can earn 13-14% in year 1:
At the time of move, some insurance carriers will issue an immediate 10% upfront bonus. The remaining 3-4 comes from your money usually being placed in a fixed bucket (like a money market) the remaining 12 months, thereby giving you a total for year 1 of 13.00-14.40%.
In addition, the insurance carrier typically guarantees protection on your rule contribution amount. This method that your investment may never dip below your rule contribution. Some insurance companies already guarantee a protection of your rule balance each anniversary year of your investment. This allows your investment to potentially grow to higher balances each year allowing those new balances to become protected in addition. (All the guarantees are based on the assumption that you leave the money in the contract for the duration of the term).- see next section
Can you lose money buying an equity-indexed annuity?
With all the equity indexed annuity guarantees, you may be wondering if you can loose money investing in these types of investments. You can lose money buying an equity-indexed annuity, especially if you need to cancel your annuity early (before the term expires). There are early withdrawal penalties that apply.
already with a guarantee, you can nevertheless lose money if your guarantee is based on an amount thats less than the complete amount of your buy payments. If your equity-indexed annuity only earned its minimum guarantee, it would take several years for it to break already.
Who are equity-indexed annuities more appropriate for?
Equity-indexed annuities tend to be more appropriate for long-term retirement monies, where you will not access your contributions and interest credits on a regular basis. These types of investors are not concerned with the early withdrawal penalties and are more interested in the guarantees and protection offered.
What are some of the contract features of equity-indexed annuities?
Equity-indexed annuities are complicated products that may contain several features that can affect your return. Bass Financial Solutions, Inc. makes it a point to help you fully understand how an equity-indexed annuity computes its index-connected interest rate before you buy. An insurance carrier may credit you with a lower return than the actual indexs gain. So theres a trade-off in kind, for the rule protection they provide. Some shared features used to compute an equity-indexed annuitys interest rate include:
Participation Rates. The participation rate determines how much of the indexs increase will be used to compute the index-connected interest rate. For example, if the participation rate is 80% and the index increases 9%, the return credited to your annuity would be 7.2% (9% x 80% = 7.2%). Interest Rate Caps. Some equity-indexed annuities set a maximum rate of interest that the equity-indexed annuity can earn. If a contract has an upper limit, or cap, of 10% and the index connected to the annuity attained 10.2%, only 10% would be credited to the annuity. Margin/Spread/Administrative Fee. The index-connected interest for some annuities is determined by subtracting a percentage from any gain in the index. This fee is sometimes called the margin, spread, or administrative fee. In the case of an annuity with a spread of 3%, if the index attained 10%, the return credited to the annuity would be 7% (10% – 3% = 7%).
Another characterize that can have an impact on an equity-indexed annuitys return is its indexing method (or how the amount of change in the applicable index is determined). Some shared indexing methods include:
Annual Reset (or Ratchet). This method credits index-connected interest based on any increase in index value from the beginning to the end of the year. Point-to-Point. This method credits index-connected interest based on any increase in index value from the beginning to the end of the contracts term. High Water Mark. This method credits index-connected interest based on any increase in index value from the index level at the beginning of the contracts term to the highest index value at various points during the contracts term, often annual anniversaries of when you purchased the annuity.
These and other features may be included in an equity-indexed annuity you are considering. Before you decide to buy an equity-indexed annuity, let Bass Financial Solutions, Inc. help you understand how each characterize works and what impact, together with other features, it may have on the annuitys possible return.
As we say to all of our clients: Like any other investment or contract that you go into into, Equity Indexed Annuities are not appropriate for everyone. They are most appropriate for those investors that have a substantial understanding of the contract features and benefits. Additionally, these features and benefits must match your stated objectives and goals for your money, in order to be a appropriate and viable different for your money. At that time, and only then, is an Equity-Indexed Annuity the right investment option for you.