Monday, March 29, 2004
Recent Client Question? www.legacyannuities.com
What is a 1035 Exchange?
Swapping Your Annuity May Yield Big Savings
Back when you bought your variable annuity, you were probably told how it could be a terrific tool to help you put away additional money for retirement. There are no maximum contribution limits like those imposed on IRAs or 401 (k) plans. You don't pay tax on the earnings until you make withdraws. You have the ability to invest in a diversified group of investment sub-accounts.
And, because of the built-in death benefit, you know that your heirs will at least receive your initial investment regardless of what happens to the market.
These are all still valid reasons to own a variable annuity. But, over recent years, there have been new developments in these instruments. Money management companies have become more efficient, insurance costs have come down, and the number of investment options has increased. So, this may be an ideal time to review your annuity contract and see if it would make sense to exchange it for another product.
Your cost to own a variable annuity includes:
• Mortality and expense risk charges to cover the risk the annuity company assumes for the insurance risk under the annuity contract
• Administrative fees that may pay for preparing and sending out reports and statements
• Underlying fund expenses for the mutual fund managers who oversee your investments
• Surrender charges that could be assessed if you take out your money before a specified period
Carefully compare your old annuity to any others you may be considering. Make sure the benefits outweigh the costs. And, don't forget that surrender charges could start all over again with a new contract. Whatever you do though, don't just surrender the annuity and then invest the proceeds in a new contract. If you were to do that, you'd have to pay income tax on any gains.
An exchange would be easier and save you current tax dollars. This swap, called a 1035 exchange, will let you transfer the money from one annuity to another without you owing any tax on the gains you've accumulated. All you have to do is fill out an exchange form and the two annuity companies do the rest. Your original annuity company however, may deduct surrender charges before it sends the funds to your new company.
What is a 1035 Exchange?
Swapping Your Annuity May Yield Big Savings
Back when you bought your variable annuity, you were probably told how it could be a terrific tool to help you put away additional money for retirement. There are no maximum contribution limits like those imposed on IRAs or 401 (k) plans. You don't pay tax on the earnings until you make withdraws. You have the ability to invest in a diversified group of investment sub-accounts.
And, because of the built-in death benefit, you know that your heirs will at least receive your initial investment regardless of what happens to the market.
These are all still valid reasons to own a variable annuity. But, over recent years, there have been new developments in these instruments. Money management companies have become more efficient, insurance costs have come down, and the number of investment options has increased. So, this may be an ideal time to review your annuity contract and see if it would make sense to exchange it for another product.
Your cost to own a variable annuity includes:
• Mortality and expense risk charges to cover the risk the annuity company assumes for the insurance risk under the annuity contract
• Administrative fees that may pay for preparing and sending out reports and statements
• Underlying fund expenses for the mutual fund managers who oversee your investments
• Surrender charges that could be assessed if you take out your money before a specified period
Carefully compare your old annuity to any others you may be considering. Make sure the benefits outweigh the costs. And, don't forget that surrender charges could start all over again with a new contract. Whatever you do though, don't just surrender the annuity and then invest the proceeds in a new contract. If you were to do that, you'd have to pay income tax on any gains.
An exchange would be easier and save you current tax dollars. This swap, called a 1035 exchange, will let you transfer the money from one annuity to another without you owing any tax on the gains you've accumulated. All you have to do is fill out an exchange form and the two annuity companies do the rest. Your original annuity company however, may deduct surrender charges before it sends the funds to your new company.
Wednesday, March 24, 2004
When Is A Fixed Annuity Better Than A Municipal Bond?
It's common for investors to seek tax savings with their investments. Is it better to go for the tax deferral of a fixed annuity or the tax free benefits of a municipal bond? Although these alternatives are different in several ways, they share similarities attractive to conservative investors:
Guarantee of principal (guaranteed by the municipality in the case of the bond and by the issuing insurance company in the case of the annuity)
Fixed term
Ability to liquidate at any time (annuities may be subject to surrender charges for early withdrawal and
municipal bonds sold prior to maturity may result in a gain or loss)
Tax savings
The chart below compares a municipal bond at hypothetical rates of 5% to a fixed annuity at 6%. The ending value after 20 years is better for the municipal bond if the investor is in a higher tax bracket (35% combined) but the annuity grows larger better if the investor is in a lower tax bracket (18% combined).
Bond Annuity Annuity
$100,000 Investment 35% tax 18% tax
Value After 20 years 268,506 326,203
Income Tax 0 79,171 40,716
After Tax 247,031 285,486
Hypothetical chart assumptions: all interest reinvested and compounded at initial rate, municipal bond at 5%, annuity at 6%.
Therefore, your future tax bracket is a major factor in this decision including yet not limited to these factors:
If you need periodic income, the bond may be more appropriate as bonds pay interest semiannually
Interest cannot be reinvested in municipal bonds which could favor the annuity, if you do not desire current income
Annuities provide an annuitization feature which provides income for a fixed period of years or life and municipal bonds do not have this feature
For assistance in choosing the more appropriate option for your circumstances, please check the reply coupon.
(Note that municipal bonds have a fixed return for their entire term and some annuities do not. Bonds are guaranteed by the issuing municipality and annuities are guaranteed by the issuing insurer. Bonds may be callable, annuities are not. Bond usually require purchase through a broker dealer requiring a commission while annuities do not typically have commissions paid by the investor but have surrender charges for early surrender. Interest on municipal bonds is free of federal tax and possibly state tax while annuity interest is deferred and later taxed as ordinary income. Municipal bonds sold prior to maturity are subject to gains or loss and annuities redeemed prior to term incur a surrender charge. Annuity withdrawals prior to age 591/2 may incur a penalty).
It's common for investors to seek tax savings with their investments. Is it better to go for the tax deferral of a fixed annuity or the tax free benefits of a municipal bond? Although these alternatives are different in several ways, they share similarities attractive to conservative investors:
Guarantee of principal (guaranteed by the municipality in the case of the bond and by the issuing insurance company in the case of the annuity)
Fixed term
Ability to liquidate at any time (annuities may be subject to surrender charges for early withdrawal and
municipal bonds sold prior to maturity may result in a gain or loss)
Tax savings
The chart below compares a municipal bond at hypothetical rates of 5% to a fixed annuity at 6%. The ending value after 20 years is better for the municipal bond if the investor is in a higher tax bracket (35% combined) but the annuity grows larger better if the investor is in a lower tax bracket (18% combined).
Bond Annuity Annuity
$100,000 Investment 35% tax 18% tax
Value After 20 years 268,506 326,203
Income Tax 0 79,171 40,716
After Tax 247,031 285,486
Hypothetical chart assumptions: all interest reinvested and compounded at initial rate, municipal bond at 5%, annuity at 6%.
Therefore, your future tax bracket is a major factor in this decision including yet not limited to these factors:
If you need periodic income, the bond may be more appropriate as bonds pay interest semiannually
Interest cannot be reinvested in municipal bonds which could favor the annuity, if you do not desire current income
Annuities provide an annuitization feature which provides income for a fixed period of years or life and municipal bonds do not have this feature
For assistance in choosing the more appropriate option for your circumstances, please check the reply coupon.
(Note that municipal bonds have a fixed return for their entire term and some annuities do not. Bonds are guaranteed by the issuing municipality and annuities are guaranteed by the issuing insurer. Bonds may be callable, annuities are not. Bond usually require purchase through a broker dealer requiring a commission while annuities do not typically have commissions paid by the investor but have surrender charges for early surrender. Interest on municipal bonds is free of federal tax and possibly state tax while annuity interest is deferred and later taxed as ordinary income. Municipal bonds sold prior to maturity are subject to gains or loss and annuities redeemed prior to term incur a surrender charge. Annuity withdrawals prior to age 591/2 may incur a penalty).
Recent Client Question www.legacyannuities.com
When will interest rates go up?
Annuity rates will probably start increasing in late 2004.We are at a 45 year low for rates and the consensus is that we hit a bottom.With the economy growing slowly,terrorism and it being an election year the Fed and insurance companys will be in no rush to raise rates.
When will interest rates go up?
Annuity rates will probably start increasing in late 2004.We are at a 45 year low for rates and the consensus is that we hit a bottom.With the economy growing slowly,terrorism and it being an election year the Fed and insurance companys will be in no rush to raise rates.
Tuesday, March 23, 2004
Immediate Annuity www.legacyannuities.com
Real life case study:
Here’s How Mary Increased the Value of Her Annuity by 700%!
Lots of seniors have purchased annuities for their safety, simplicity and tax deferral. And many financial planners would agree that annuities are a good idea. Yet many annuity owners lose half of their annuity value and most aren’t even aware of this!
Let’s take a look at how this happens. Mary, age 55, purchased a fixed annuity for $50,000. She held it for 10 years and the interest accumulated nicely. The account doubled to $100,000. So far, Mary was very happy with this safe alternative. She never gave much thought to what happens to the annuity at her death. She figured she would eventually withdraw the money and use it.
The truth is, less than 10% of the annuity owners I meet make any withdrawals from their annuity. These owners die with the policies and can get hit with some very large taxes. In Mary’s case, here’s the picture at death when the taxes are due:
Annuity value $100,000
Income Tax -20,000
Estate Tax -32,000
Beneficiaries get $ 48,000
In the blink of an eye, Mary's beneficiary loses $52,000! Over half of the annuity value! Is there a remedy? YES!
If you do not plan to use the annuity for yourself, you can make a smart move with the following tactic:
Annuitize the annuity (deferred tax or sales charges could apply or 10% tax penalty if under age 59½, so please call for a review of your contract). When you annuitize the annuity, you select a payout option, that may include a lifetime income from the annuity company. You trade the $100,000 balance for a guaranteed income for life (or any period you choose). (The shorter the period, the higher will be the monthly income paid to you). If you want to know how much monthly income you can receive, please phone with your balance and age and I will send you a printout of monthly income.
Mary had her insurance company make monthly payments to her of $735. She did not need the money, so she deposited the after tax amount for a life insurance policy on her life, payable to her beneficiaries.
Based on Mary's current age of 65 (and assuming she is a preferred non-smoker) This $735 ($588 after taxes) per month purchased her a $341,000 universal life policy.
Now, instead of Mary’s heirs getting only $48,000 at her death (what they would have received after the taxes on the annuity, as I showed you on the previous page), the heirs receive $341,000 of life insurance death benefit, free of estate and income tax! That’s 7 times as much money for the beneficiaries! A 700% return!!
Let’s say you start the payments from the annuity as I described. Each payment you receive from the annuity, you are depositing for the life insurance. Even if you died after the first deposit on the life insurance, your beneficiaries would still receive the entire $341,000 death benefit on the life insurance policy. Additionally, some annuity companies will give your beneficiary the unpaid amount on the annuity, depending on the payout option selected (deferred interest would be taxable to the beneficiaries).
By selecting the appropriate payout option, if you received only one year’s monthly payments (about $8000) and then died, the annuity company would give your beneficiaries the remaining $92,000. Under this scenario, your beneficiaries receive $341,000 tax free from the life insurance company and $92,000 (subject to income tax) from the annuity company!! Over $430,000 after all taxes rather than $48,000 if you just sit on the annuity!
If you would like to see this analysis for your annuity and your situation, we have a computerized illustration available to send you. Simply call and provide information on your current annuity and your age.
Notes
1 This analysis may not be accurate for every annuity owner as some people do not pay estate taxes. We assume a federal and state combined income tax bracket of 40% which may be higher or lower than your actual tax bracket. A single taxpayer with taxable income over $62,000 will have a federal tax bracket of 31% and a 9% state tax bracket in high tax states such as California.
2 Single premium immediate annuity (SPIA 4), lifetime payments, issued by American Life and Casualty Insurance Company, a Conseco Company, Carmel, IN. Illustration as of 5/19/97. 0112-IG-0161
3 Connecticut General Life Insurance UL-I, Form LN525 and state variations thereof. Premium assumes current credited interest rate of 7% and current cost of insurance charges. The guaranteed rate on this policy is 4%.
4 We can explain the additional estate planning required to keep the proceeds of your life insurance policy out of your estate so that it passes free of estate taxes. Additionally, you need to qualify medically and financially for the life insurance coverage. This suggestion may not be beneficial in all cases. It depends on your income and estate tax bracket.
Real life case study:
Here’s How Mary Increased the Value of Her Annuity by 700%!
Lots of seniors have purchased annuities for their safety, simplicity and tax deferral. And many financial planners would agree that annuities are a good idea. Yet many annuity owners lose half of their annuity value and most aren’t even aware of this!
Let’s take a look at how this happens. Mary, age 55, purchased a fixed annuity for $50,000. She held it for 10 years and the interest accumulated nicely. The account doubled to $100,000. So far, Mary was very happy with this safe alternative. She never gave much thought to what happens to the annuity at her death. She figured she would eventually withdraw the money and use it.
The truth is, less than 10% of the annuity owners I meet make any withdrawals from their annuity. These owners die with the policies and can get hit with some very large taxes. In Mary’s case, here’s the picture at death when the taxes are due:
Annuity value $100,000
Income Tax -20,000
Estate Tax -32,000
Beneficiaries get $ 48,000
In the blink of an eye, Mary's beneficiary loses $52,000! Over half of the annuity value! Is there a remedy? YES!
If you do not plan to use the annuity for yourself, you can make a smart move with the following tactic:
Annuitize the annuity (deferred tax or sales charges could apply or 10% tax penalty if under age 59½, so please call for a review of your contract). When you annuitize the annuity, you select a payout option, that may include a lifetime income from the annuity company. You trade the $100,000 balance for a guaranteed income for life (or any period you choose). (The shorter the period, the higher will be the monthly income paid to you). If you want to know how much monthly income you can receive, please phone with your balance and age and I will send you a printout of monthly income.
Mary had her insurance company make monthly payments to her of $735. She did not need the money, so she deposited the after tax amount for a life insurance policy on her life, payable to her beneficiaries.
Based on Mary's current age of 65 (and assuming she is a preferred non-smoker) This $735 ($588 after taxes) per month purchased her a $341,000 universal life policy.
Now, instead of Mary’s heirs getting only $48,000 at her death (what they would have received after the taxes on the annuity, as I showed you on the previous page), the heirs receive $341,000 of life insurance death benefit, free of estate and income tax! That’s 7 times as much money for the beneficiaries! A 700% return!!
Let’s say you start the payments from the annuity as I described. Each payment you receive from the annuity, you are depositing for the life insurance. Even if you died after the first deposit on the life insurance, your beneficiaries would still receive the entire $341,000 death benefit on the life insurance policy. Additionally, some annuity companies will give your beneficiary the unpaid amount on the annuity, depending on the payout option selected (deferred interest would be taxable to the beneficiaries).
By selecting the appropriate payout option, if you received only one year’s monthly payments (about $8000) and then died, the annuity company would give your beneficiaries the remaining $92,000. Under this scenario, your beneficiaries receive $341,000 tax free from the life insurance company and $92,000 (subject to income tax) from the annuity company!! Over $430,000 after all taxes rather than $48,000 if you just sit on the annuity!
If you would like to see this analysis for your annuity and your situation, we have a computerized illustration available to send you. Simply call and provide information on your current annuity and your age.
Notes
1 This analysis may not be accurate for every annuity owner as some people do not pay estate taxes. We assume a federal and state combined income tax bracket of 40% which may be higher or lower than your actual tax bracket. A single taxpayer with taxable income over $62,000 will have a federal tax bracket of 31% and a 9% state tax bracket in high tax states such as California.
2 Single premium immediate annuity (SPIA 4), lifetime payments, issued by American Life and Casualty Insurance Company, a Conseco Company, Carmel, IN. Illustration as of 5/19/97. 0112-IG-0161
3 Connecticut General Life Insurance UL-I, Form LN525 and state variations thereof. Premium assumes current credited interest rate of 7% and current cost of insurance charges. The guaranteed rate on this policy is 4%.
4 We can explain the additional estate planning required to keep the proceeds of your life insurance policy out of your estate so that it passes free of estate taxes. Additionally, you need to qualify medically and financially for the life insurance coverage. This suggestion may not be beneficial in all cases. It depends on your income and estate tax bracket.
Monday, March 22, 2004
Equity Index Annuity www.legacyannuities.com
Here is a nice write up on Equity Index Annuities From the "National Association of Insurance Commissioners".
BUYER'S GUIDE TO EQUITY-INDEXED ANNUITIES
Prepared by the National Association of Insurance Commissioners
Home > Consumer Information > Life Insurance and Annuities >
The National Association of Insurance Commissioners is an association of state insurance regulatory officials. This association helps the various insurance departments to coordinate insurance laws for the benefit of all consumers.
This guide does not endorse any company or policy.
Reprinted by the Illinois Department of Insurance
This Guide has been written to help you understand annuities in general and equity-indexed annuities in particular. There are different kinds of annuities. It is important for you to understand the differences among various annuities so you can choose the kind that best fits your needs. At the end of this Guide are questions you should ask your agent or the company. Make sure you are satisfied with the answers before you make a purchase.
WHAT IS AN ANNUITY?
An annuity is a series of income payments made at regular intervals by an insurance company in return for a premium or premiums you have paid. The most frequent use of income payments from an annuity is for retirement.
An annuity is neither a life insurance nor a health insurance policy. It is not a savings account or a savings certificate. You should not buy an annuity for short-term purposes.
WHAT ARE THE DIFFERENT KINDS OF ANNUITY CONTRACTS?
Individual or Group
An individual contract covers only one or two persons. A group contract covers a specific group of people, for example, the employees of an employer.
Immediate or Deferred
An immediate annuity begins to make income payments soon after you pay the premium. The income payments from a deferred annuity start later, often many years later. Deferred annuities have an "accumulation" period, which is the time between when you start paying premiums and when income payments start. The time after income payments start is called the "payout" period.
Single Premium or Installment Premium
You pay the insurance company only one premium for a single premium annuity. You pay for an installment premium annuity through a series of payments. There are two kinds of installment premium annuities. One kind is a flexible premium contract. You can pay as much as you want, whenever you want, within set limits. The other kind is a scheduled premium contract, which specifies how much your premiums will be and how often you will pay them.
Fixed or Variable
During the accumulation period of a fixed deferred annuity, premiums (less any applicable charges) earn interest at rates set by the company or in a way spelled out in the annuity contract. The company guarantees that it will pay no less than a minimum rate of interest. During the payout phase, the amount of each income payment you receive is generally set when the payments start and does not change.
During the accumulation period of a variable annuity, premiums (less any applicable charges) are put into a separate account of the insurance company. You decide how those premiums will be invested, from stock or bond mutual fund choices. The value of the separate account, and therefore, the value of your variable annuity, varies with the investment experience of the funds you choose. There is no guarantee that you will receive all of your premiums back. There is also no guarantee that you will earn any return on your annuity. During the payout period of a variable annuity, the amount of each income payment you receive may be fixed (predetermined) or variable (changing with the value of the investments in the separate account).
WHAT ARE EQUITY-INDEXED ANNUITIES?
An equity-indexed annuity is a fixed annuity, either immediate or deferred, that earns interest or provides benefits that are linked to an external equity reference or an equity index. The value of the index might be tied to a stock or other equity index. One of the most commonly used indices is Standard & Poor's 500 Composite Stock Price Index (the S&P 500), which is an equity index. The value of any index varies from day to day and is not predictable.
When you buy an equity-indexed annuity you own an insurance contract. You are not buying shares of any stock of index.
While immediate equity-indexed annuities may be available, this Buyer's Guide will focus on deferred equity-indexed annuities.
HOW ARE THEY DIFFERENT FROM OTHER FIXED ANNUITIES?
An equity-indexed annuity is different from other fixed annuities because of the way it credits interest to your annuity's value. Some fixed annuities only credit interest calculated at a rate set in the contract. Other fixed annuities also credit interest at rates set from time to time by the insurance company. Equity-indexed annuities credit interest using a formula based on changes in the index to which the annuity is linked. The formula decides how the additional interest, if any, is calculated and credited. How much additional interest you get and when you get it depends on the features of your particular annuity.
Your equity-indexed annuity, like other fixed annuities, also promises to pay a minimum interest rate. The rate that will be applied will not be less than this minimum guaranteed rate even if the index-linked interest rate is lower. The value of your annuity also will not drop below a guaranteed minimum. For example, many single premium annuity contracts guarantee the minimum value will never be less than 90 percent of the premium paid, plus at least 3% in annual interest (less any partial withdrawals). The guaranteed value is the minimum amount available during a term for withdrawals, as well as for some annuitizations (see "Annuity Income Payments") and death benefits. The insurance company will adjust the value of the annuity at the end of each term to reflect any index increases.
WHAT ARE SOME OF THE CONTRACT FEATURES?
Two features that have the greatest effect on the amount of additional interest that may be credited to an equity-indexed annuity are the indexing method and the participation rate. It is important to understand the features and how they work together. The following describes some other equity-indexed annuity features that affect the index-linked formula.
Since new equity indexed annuity products are being developed, the contract you are interested in may contain a feature that is not discussed in this Buyer's Guide. If this is the case, ask your agent for an explanation that you understand.
Indexing Method
The indexing method means the approach used to measure the amount of change, if any, in the index. Some of the most common indexing methods, which are explained more fully later on, include annual reset (ratcheting), high-water mark and point-to-point.
Term
The index term is the period over which index-linked interest is calculated. In most product designs, interest is credited to your annuity at the end of a term. Terms are generally from one to ten years, with six or seven years being most common. Some annuities offer single terms while others offer multiple, consecutive terms. If your annuity has multiple terms, there will usually be a window at the end of each term, typically 30 days, during which you may withdraw your money without penalty. For installment premium annuities, the payment of each premium may begin a new term for that premium.
Participation Rate
The participation rate decides how much of the increase in the index will be used to calculate index-linked interest. For example, if the calculated change in the index is 9% and the participation rate is 70%, the index-linked interest rate for your annuity will be 6.3% (9% x 70% = 6.3%). A company may set a different participation rate for newly issued annuities as often as each day. Therefore, the initial participation rate in your annuity will depend on when it is issued by the company. The company usually guarantees the participation rate for a specific period (from one year to the entire term). When that period is over, the company sets a new participation rate for the next period. Some annuities guarantee that the participation rate will never be set lower than a specified minimum or higher than a specified maximum.
Cap Rate or Cap
Some annuities may put an upper limit, or cap, on the index-linked interest rate. This is the maximum rate of interest the annuity will earn. In the example given above, if the contract has a 6% cap rate, 6%, and not 6.3%, would be credited. Not all annuities have a cap rate.
Floor on Equity Index-Linked Interest
The floor is the minimum index-linked interest rate you will earn. The most common floor is 0%. A 0% floor assures that even if the index decreases in value, the index-linked interest that you earn will be zero and not negative. As in the case of a cap, not all annuities have a stated floor on index-linked interest rates. But in all cases, your fixed annuity will have a minimum guaranteed value.
Averaging
In some annuities, the average of an index's value is used rather than the actual value of the index on a specified date. The index averaging may occur at the beginning, the end, or throughout the entire term of the annuity.
Interest Compounding
Some annuities pay simple interest during an index term. That means index-linked interest is added to your original premium amount but does not compound during the term. Others pay compound interest during a term, which means that index-linked interest that has already been credited also earns interest in the future. In either case, however, the interest earned in one term is usually compounded in the next.
Margin/Spread/Administrative Fee
In some annuities, the index-linked interest rate is computed by subtracting a specific percentage from any calculated change in the index. This percentage, sometimes referred to as the "margin," "spread," or "administrative fee," might be instead of, or in addition to, a participation rate. For example, if the calculated change in the index is 10%, your annuity might specify that 2.25% will be subtracted from the rate to determine the interest rate credited. In this example, the rate would be 7.75% (10% - 2.25% = 7.75%). In this example, the company subtracts the percentage only if the change in the index produces a positive interest rate.
Vesting
Some annuities credit none of the index-linked interest or only part of it, if you take out all your money before the end of the term. The percentage that is vested, or credited, generally increases as the term comes closer to its end and is always 100% at the end of the term.
HOW DO THE COMMON INDEXING METHODS DIFFER?
Annual Reset
Index-linked interest, if any, is determined each year by comparing the index value at the end of the contract year with the index value at the start of the contract year. Interest is added to your annuity each year during the term.
High-Water Mark
The index-linked interest, if any, is decided by looking at the index value at various points during the term, usually the annual anniversaries of the date you bought the annuity. The interest is based on the difference between the highest index value and the index value at the start of the term. Interest is added to your annuity at the end of the term.
Point-to-Point
The index-linked interest, if any, is based on the difference between the index value at the end of the term and the index value at the start of the term. Interest is added to your annuity at the end of the term.
WHAT ARE SOME OF THE FEATURES AND TRADE-OFFS OF DIFFERENT INDEXING METHODS?
Generally, annuities offer preset combinations of features. You may have to make trade-offs to get features you want in an annuity. This means the annuity you choose may also have features you don't want.
Features Trade-Offs
Annual Reset
Since the interest earned is "locked in" annually and the index value is "reset" at the end of each year, future decreases in the index will not affect the interest you have already earned. Therefore, your annuity using the annual reset method may credit more interest than annuities using other methods when the index fluctuates up and down often during the term. This design is more likely than others to give you access to index-linked interest before the term ends. Your annuity's participation rate may change each year and generally will be lower than that of other indexing methods. Also an annual reset design may use a cap or averaging to limit the total amount of interest you might earn each year.
High-Water Mark
Since interest is calculated using the highest value of the index on a contract anniversary during the term, this design may credit higher interest than some other designs if the index reaches a high point early or in the middle of the term, then drops off at the end of the term. Interest is not credited until the end of the term. In some annuities, if you surrender your annuity before the end of the term, you may not get index-linked interest for that term. In other annuities, you may receive index-linked interest, based on the highest anniversary value to date and the annuity's vesting schedule. Also, contracts with this design may have a lower participation rate than annuities using other designs or may use a cap to limit the total amount of interest you might earn.
Point-to-Point
Since interest cannot be calculated before the end of the term, use of this design may permit a higher participation rate than annuities using other designs. Since interest is not credited until the end of the term, typically six or seven years, you may not be able to get the index-linked interest until the end of the term.
WHAT IS THE IMPACT OF SOME OTHER PRODUCT FEATURES?
Cap on Interest Earned
While a cap limits the amount of interest you might earn each year, annuities with this feature may have other product features you want, such as annual interest crediting or the ability to take partial withdrawals. Also, annuities that have a cap may have a higher participation rate.
Averaging
Averaging at the beginning of a term protects you from buying your annuity at a high point, which would reduce the amount of interest you might earn. Averaging at the end of the term protects you against severe declines in the index and losing index-linked interest as a result. On the other hand, averaging may reduce the amount of index-linked interest you earn when the index rises either near the start or at the end of the term.
Participation Rate
The participation rate may vary greatly from one annuity to another and from time to time within a particular annuity. Therefore, it is important for you to know how your annuity's participation rate works with the indexing method. A high participation rate may be offset by other features, such as simple interest, averaging, or a point-to-point indexing method. On the other hand, an insurance company may offset a lower participation rate by also offering a feature such as an annual reset indexing method.
Interest Compounding
It is important for you to know whether your annuity pays compound or simple interest during a term. While you may earn less from an annuity that pays simple interest, it may have other features you want, such as a higher participation rate.
If there is a product feature that you do not understand, ask your agent. If you still do not understand, send the company a letter telling them that you want a written response so you can study their reply. You will be doing yourself a service!
CAN I TAKE MY MONEY OUT DURING THE TERM?
In most cases, you can take all or part of the money out of a deferred annuity at any time during the term. There may be a cost if you do. Sometimes the cost is a stated dollar amount. In other cases, you give up index-linked interest on the amount withdrawn. Some annuities do not let you make a partial withdrawal until the end of a term.
WHAT WILL IT COST ME TO TAKE MY MONEY OUT EARLY?
If you withdraw all or part of the value in your annuity before the end of the term, a withdrawal or surrender charge may be applied. A withdrawal charge is usually a percentage of the amount being withdrawn. The percentage may be reduced or eliminated after the annuity has been in force for a certain number of years. Sometimes the charge is a reduction in the interest rate credited to the annuity.
Some annuities credit none of the index-linked interest or only part of it if you take out all your money before the end of the term. The percentage that is vested, or credited, generally increases as the term comes closer to its end and is always 100% at the end of the term.
IS THERE ALWAYS A CHARGE TO TAKE MY MONEY OUT EARLY?
Your annuity may have a limited "free withdrawal" provision. This lets you make one or more withdrawals without charge each year. The size of the free withdrawal is limited to a set percentage of your annuity's guaranteed or accumulated value. If you make a larger withdrawal, you may pay withdrawal charges. You may also lose index-linked interest on amounts you withdraw.
Most annuities waive withdrawal charges on withdrawals made within a set number of days at the end of each term. Some annuities waive withdrawal charges if you are confined to a nursing home or diagnosed with a terminal illness. You may, however, lose index-linked interest on withdrawals.
ARE DIVIDENDS INCLUDED IN THE INDEX?
Depending on the index used, stock dividends may or may not be included in the index's value. For example, the S&P 500 is a stock price index and only considers the prices of stocks. It does not recognize any dividends paid on those stocks.
WHAT ARE SOME OTHER EQUITY-INDEXED ANNUITY CONTRACT BENEFITS?
Annuity Income Payments
One of the most important benefits of deferred annuities is the right to use the value built up during the accumulation period to provide income payments during the payout period. While income payments are usually made monthly, you can often choose more or less frequent payments. The size of income payments is based on both the accumulated value in your annuity and the annuity's "benefit rate" that is in effect when income payments begin.
The insurance company uses the benefits rate to compute the amount of income payment it will pay you for each $1,000 of accumulated value in your annuity. The benefit rate usually depends on your age and sex, and the form of annuity payment you have chosen. You can usually choose from many forms of annuity payments. You might choose payments that continue as long as you live, or as long as either you or your spouse live, or payments that continue for a set number of years.
Death Benefit
Annuities provide a variety of death benefits. The most common death benefit is either the guaranteed minimum value or the value determined by the index-linked formula.
Tax Deferral
Federal income tax on interest accumulated in an annuity is deferred until you take the interest out of the annuity. You may be required to pay taxes then on the tax-deferred accumulation. You may have to pay a tax penalty if you withdraw the accumulation before you are age 59½. The advantage of tax deferral is that you will probably be in a lower tax bracket in retirement than while you are employed. Also, during the accumulation period, you will be earning interest on money that you would otherwise have used to pay taxes. Tax-qualified annuities are subject to different rules. In any case, you should consult your own tax advisor.
HOW DO I KNOW IF AN EQUITY-INDEXED ANNUITY IS RIGHT FOR ME?
The questions listed below may help you decide which type of annuity, if any, meets your retirement planning and financial needs. You should consider what your goals are for the money you may put into the annuity. You need to think about how much risk you're willing to take with the money. Ask yourself:
How long can I leave my money in the annuity?
What do I expect to use the money for in the future?
Am I interested in a variable annuity with the potential for higher earnings that are not guaranteed and willing to risk losing the principal?
Is a guaranteed interest rate more important to me, with little or no risk of losing the principal?
Or, am I somewhere in between these two extremes and willing to take some risks?
HOW DO I KNOW WHICH EQUITY-INDEXED ANNUITY IS BEST FOR ME?
As with any other insurance product, you must carefully consider your own personal situation and how you feel about the choices available. No single annuity design may have all the features you want. It is important to understand the features and trade-offs available so you can choose the annuity that is right for you. Keep in mind that it may be misleading to compare one annuity to another unless you compare all the other features of each annuity. You must decide for yourself what combination of features makes the most sense for you. Also, remember that it is not possible to predict the future market behavior of an index.
QUESTIONS YOU SHOULD ASK YOUR AGENT OR THE COMPANY
What is the guaranteed minimum interest rate?
What charges, if any, are deducted from my premium?
What charges, if any, are deducted from my contract value?
How long is the term?
What is the participation rate?
For how long is the participation rate guaranteed?
Is there a minimum participation rate?
Does my contract have a cap?
Is averaging used? How does it work?
Is interest compounded during a term?
Is there a margin, spread, or administrative fee? Is that in addition to or instead of a participation rate?
Which indexing method is used in my contract?
What are the surrender charges or penalties if I want to end my contract early and take out all of my money?
Can I get a partial withdrawal without paying charges or losing interest? Does my contract have vesting?
Does my annuity waive withdrawal charges if I am confined to a nursing home or diagnosed with a terminal illness?
What annuity income payment options do I have?
What is the death benefit?
FINAL POINTS TO CONSIDER
It is very important that you choose an annuity that you understand well. The purpose of this Buyer's Guide is to help you to understand your annuity. Your agent or insurance company can guide you. Remember that the quality of service you can expect from the company and the agent should also be important to you when you buy an annuity.
When you receive your contract, read it carefully. It may offer a "free look" period for you to decide if you want to keep the contract. Ask your agent or insurance company for an explanation of anything you don't understand. If you have a specific complaint or can't get the answers you need from your agent or company, contact your state insurance department.
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Here is a nice write up on Equity Index Annuities From the "National Association of Insurance Commissioners".
BUYER'S GUIDE TO EQUITY-INDEXED ANNUITIES
Prepared by the National Association of Insurance Commissioners
Home > Consumer Information > Life Insurance and Annuities >
The National Association of Insurance Commissioners is an association of state insurance regulatory officials. This association helps the various insurance departments to coordinate insurance laws for the benefit of all consumers.
This guide does not endorse any company or policy.
Reprinted by the Illinois Department of Insurance
This Guide has been written to help you understand annuities in general and equity-indexed annuities in particular. There are different kinds of annuities. It is important for you to understand the differences among various annuities so you can choose the kind that best fits your needs. At the end of this Guide are questions you should ask your agent or the company. Make sure you are satisfied with the answers before you make a purchase.
WHAT IS AN ANNUITY?
An annuity is a series of income payments made at regular intervals by an insurance company in return for a premium or premiums you have paid. The most frequent use of income payments from an annuity is for retirement.
An annuity is neither a life insurance nor a health insurance policy. It is not a savings account or a savings certificate. You should not buy an annuity for short-term purposes.
WHAT ARE THE DIFFERENT KINDS OF ANNUITY CONTRACTS?
Individual or Group
An individual contract covers only one or two persons. A group contract covers a specific group of people, for example, the employees of an employer.
Immediate or Deferred
An immediate annuity begins to make income payments soon after you pay the premium. The income payments from a deferred annuity start later, often many years later. Deferred annuities have an "accumulation" period, which is the time between when you start paying premiums and when income payments start. The time after income payments start is called the "payout" period.
Single Premium or Installment Premium
You pay the insurance company only one premium for a single premium annuity. You pay for an installment premium annuity through a series of payments. There are two kinds of installment premium annuities. One kind is a flexible premium contract. You can pay as much as you want, whenever you want, within set limits. The other kind is a scheduled premium contract, which specifies how much your premiums will be and how often you will pay them.
Fixed or Variable
During the accumulation period of a fixed deferred annuity, premiums (less any applicable charges) earn interest at rates set by the company or in a way spelled out in the annuity contract. The company guarantees that it will pay no less than a minimum rate of interest. During the payout phase, the amount of each income payment you receive is generally set when the payments start and does not change.
During the accumulation period of a variable annuity, premiums (less any applicable charges) are put into a separate account of the insurance company. You decide how those premiums will be invested, from stock or bond mutual fund choices. The value of the separate account, and therefore, the value of your variable annuity, varies with the investment experience of the funds you choose. There is no guarantee that you will receive all of your premiums back. There is also no guarantee that you will earn any return on your annuity. During the payout period of a variable annuity, the amount of each income payment you receive may be fixed (predetermined) or variable (changing with the value of the investments in the separate account).
WHAT ARE EQUITY-INDEXED ANNUITIES?
An equity-indexed annuity is a fixed annuity, either immediate or deferred, that earns interest or provides benefits that are linked to an external equity reference or an equity index. The value of the index might be tied to a stock or other equity index. One of the most commonly used indices is Standard & Poor's 500 Composite Stock Price Index (the S&P 500), which is an equity index. The value of any index varies from day to day and is not predictable.
When you buy an equity-indexed annuity you own an insurance contract. You are not buying shares of any stock of index.
While immediate equity-indexed annuities may be available, this Buyer's Guide will focus on deferred equity-indexed annuities.
HOW ARE THEY DIFFERENT FROM OTHER FIXED ANNUITIES?
An equity-indexed annuity is different from other fixed annuities because of the way it credits interest to your annuity's value. Some fixed annuities only credit interest calculated at a rate set in the contract. Other fixed annuities also credit interest at rates set from time to time by the insurance company. Equity-indexed annuities credit interest using a formula based on changes in the index to which the annuity is linked. The formula decides how the additional interest, if any, is calculated and credited. How much additional interest you get and when you get it depends on the features of your particular annuity.
Your equity-indexed annuity, like other fixed annuities, also promises to pay a minimum interest rate. The rate that will be applied will not be less than this minimum guaranteed rate even if the index-linked interest rate is lower. The value of your annuity also will not drop below a guaranteed minimum. For example, many single premium annuity contracts guarantee the minimum value will never be less than 90 percent of the premium paid, plus at least 3% in annual interest (less any partial withdrawals). The guaranteed value is the minimum amount available during a term for withdrawals, as well as for some annuitizations (see "Annuity Income Payments") and death benefits. The insurance company will adjust the value of the annuity at the end of each term to reflect any index increases.
WHAT ARE SOME OF THE CONTRACT FEATURES?
Two features that have the greatest effect on the amount of additional interest that may be credited to an equity-indexed annuity are the indexing method and the participation rate. It is important to understand the features and how they work together. The following describes some other equity-indexed annuity features that affect the index-linked formula.
Since new equity indexed annuity products are being developed, the contract you are interested in may contain a feature that is not discussed in this Buyer's Guide. If this is the case, ask your agent for an explanation that you understand.
Indexing Method
The indexing method means the approach used to measure the amount of change, if any, in the index. Some of the most common indexing methods, which are explained more fully later on, include annual reset (ratcheting), high-water mark and point-to-point.
Term
The index term is the period over which index-linked interest is calculated. In most product designs, interest is credited to your annuity at the end of a term. Terms are generally from one to ten years, with six or seven years being most common. Some annuities offer single terms while others offer multiple, consecutive terms. If your annuity has multiple terms, there will usually be a window at the end of each term, typically 30 days, during which you may withdraw your money without penalty. For installment premium annuities, the payment of each premium may begin a new term for that premium.
Participation Rate
The participation rate decides how much of the increase in the index will be used to calculate index-linked interest. For example, if the calculated change in the index is 9% and the participation rate is 70%, the index-linked interest rate for your annuity will be 6.3% (9% x 70% = 6.3%). A company may set a different participation rate for newly issued annuities as often as each day. Therefore, the initial participation rate in your annuity will depend on when it is issued by the company. The company usually guarantees the participation rate for a specific period (from one year to the entire term). When that period is over, the company sets a new participation rate for the next period. Some annuities guarantee that the participation rate will never be set lower than a specified minimum or higher than a specified maximum.
Cap Rate or Cap
Some annuities may put an upper limit, or cap, on the index-linked interest rate. This is the maximum rate of interest the annuity will earn. In the example given above, if the contract has a 6% cap rate, 6%, and not 6.3%, would be credited. Not all annuities have a cap rate.
Floor on Equity Index-Linked Interest
The floor is the minimum index-linked interest rate you will earn. The most common floor is 0%. A 0% floor assures that even if the index decreases in value, the index-linked interest that you earn will be zero and not negative. As in the case of a cap, not all annuities have a stated floor on index-linked interest rates. But in all cases, your fixed annuity will have a minimum guaranteed value.
Averaging
In some annuities, the average of an index's value is used rather than the actual value of the index on a specified date. The index averaging may occur at the beginning, the end, or throughout the entire term of the annuity.
Interest Compounding
Some annuities pay simple interest during an index term. That means index-linked interest is added to your original premium amount but does not compound during the term. Others pay compound interest during a term, which means that index-linked interest that has already been credited also earns interest in the future. In either case, however, the interest earned in one term is usually compounded in the next.
Margin/Spread/Administrative Fee
In some annuities, the index-linked interest rate is computed by subtracting a specific percentage from any calculated change in the index. This percentage, sometimes referred to as the "margin," "spread," or "administrative fee," might be instead of, or in addition to, a participation rate. For example, if the calculated change in the index is 10%, your annuity might specify that 2.25% will be subtracted from the rate to determine the interest rate credited. In this example, the rate would be 7.75% (10% - 2.25% = 7.75%). In this example, the company subtracts the percentage only if the change in the index produces a positive interest rate.
Vesting
Some annuities credit none of the index-linked interest or only part of it, if you take out all your money before the end of the term. The percentage that is vested, or credited, generally increases as the term comes closer to its end and is always 100% at the end of the term.
HOW DO THE COMMON INDEXING METHODS DIFFER?
Annual Reset
Index-linked interest, if any, is determined each year by comparing the index value at the end of the contract year with the index value at the start of the contract year. Interest is added to your annuity each year during the term.
High-Water Mark
The index-linked interest, if any, is decided by looking at the index value at various points during the term, usually the annual anniversaries of the date you bought the annuity. The interest is based on the difference between the highest index value and the index value at the start of the term. Interest is added to your annuity at the end of the term.
Point-to-Point
The index-linked interest, if any, is based on the difference between the index value at the end of the term and the index value at the start of the term. Interest is added to your annuity at the end of the term.
WHAT ARE SOME OF THE FEATURES AND TRADE-OFFS OF DIFFERENT INDEXING METHODS?
Generally, annuities offer preset combinations of features. You may have to make trade-offs to get features you want in an annuity. This means the annuity you choose may also have features you don't want.
Features Trade-Offs
Annual Reset
Since the interest earned is "locked in" annually and the index value is "reset" at the end of each year, future decreases in the index will not affect the interest you have already earned. Therefore, your annuity using the annual reset method may credit more interest than annuities using other methods when the index fluctuates up and down often during the term. This design is more likely than others to give you access to index-linked interest before the term ends. Your annuity's participation rate may change each year and generally will be lower than that of other indexing methods. Also an annual reset design may use a cap or averaging to limit the total amount of interest you might earn each year.
High-Water Mark
Since interest is calculated using the highest value of the index on a contract anniversary during the term, this design may credit higher interest than some other designs if the index reaches a high point early or in the middle of the term, then drops off at the end of the term. Interest is not credited until the end of the term. In some annuities, if you surrender your annuity before the end of the term, you may not get index-linked interest for that term. In other annuities, you may receive index-linked interest, based on the highest anniversary value to date and the annuity's vesting schedule. Also, contracts with this design may have a lower participation rate than annuities using other designs or may use a cap to limit the total amount of interest you might earn.
Point-to-Point
Since interest cannot be calculated before the end of the term, use of this design may permit a higher participation rate than annuities using other designs. Since interest is not credited until the end of the term, typically six or seven years, you may not be able to get the index-linked interest until the end of the term.
WHAT IS THE IMPACT OF SOME OTHER PRODUCT FEATURES?
Cap on Interest Earned
While a cap limits the amount of interest you might earn each year, annuities with this feature may have other product features you want, such as annual interest crediting or the ability to take partial withdrawals. Also, annuities that have a cap may have a higher participation rate.
Averaging
Averaging at the beginning of a term protects you from buying your annuity at a high point, which would reduce the amount of interest you might earn. Averaging at the end of the term protects you against severe declines in the index and losing index-linked interest as a result. On the other hand, averaging may reduce the amount of index-linked interest you earn when the index rises either near the start or at the end of the term.
Participation Rate
The participation rate may vary greatly from one annuity to another and from time to time within a particular annuity. Therefore, it is important for you to know how your annuity's participation rate works with the indexing method. A high participation rate may be offset by other features, such as simple interest, averaging, or a point-to-point indexing method. On the other hand, an insurance company may offset a lower participation rate by also offering a feature such as an annual reset indexing method.
Interest Compounding
It is important for you to know whether your annuity pays compound or simple interest during a term. While you may earn less from an annuity that pays simple interest, it may have other features you want, such as a higher participation rate.
If there is a product feature that you do not understand, ask your agent. If you still do not understand, send the company a letter telling them that you want a written response so you can study their reply. You will be doing yourself a service!
CAN I TAKE MY MONEY OUT DURING THE TERM?
In most cases, you can take all or part of the money out of a deferred annuity at any time during the term. There may be a cost if you do. Sometimes the cost is a stated dollar amount. In other cases, you give up index-linked interest on the amount withdrawn. Some annuities do not let you make a partial withdrawal until the end of a term.
WHAT WILL IT COST ME TO TAKE MY MONEY OUT EARLY?
If you withdraw all or part of the value in your annuity before the end of the term, a withdrawal or surrender charge may be applied. A withdrawal charge is usually a percentage of the amount being withdrawn. The percentage may be reduced or eliminated after the annuity has been in force for a certain number of years. Sometimes the charge is a reduction in the interest rate credited to the annuity.
Some annuities credit none of the index-linked interest or only part of it if you take out all your money before the end of the term. The percentage that is vested, or credited, generally increases as the term comes closer to its end and is always 100% at the end of the term.
IS THERE ALWAYS A CHARGE TO TAKE MY MONEY OUT EARLY?
Your annuity may have a limited "free withdrawal" provision. This lets you make one or more withdrawals without charge each year. The size of the free withdrawal is limited to a set percentage of your annuity's guaranteed or accumulated value. If you make a larger withdrawal, you may pay withdrawal charges. You may also lose index-linked interest on amounts you withdraw.
Most annuities waive withdrawal charges on withdrawals made within a set number of days at the end of each term. Some annuities waive withdrawal charges if you are confined to a nursing home or diagnosed with a terminal illness. You may, however, lose index-linked interest on withdrawals.
ARE DIVIDENDS INCLUDED IN THE INDEX?
Depending on the index used, stock dividends may or may not be included in the index's value. For example, the S&P 500 is a stock price index and only considers the prices of stocks. It does not recognize any dividends paid on those stocks.
WHAT ARE SOME OTHER EQUITY-INDEXED ANNUITY CONTRACT BENEFITS?
Annuity Income Payments
One of the most important benefits of deferred annuities is the right to use the value built up during the accumulation period to provide income payments during the payout period. While income payments are usually made monthly, you can often choose more or less frequent payments. The size of income payments is based on both the accumulated value in your annuity and the annuity's "benefit rate" that is in effect when income payments begin.
The insurance company uses the benefits rate to compute the amount of income payment it will pay you for each $1,000 of accumulated value in your annuity. The benefit rate usually depends on your age and sex, and the form of annuity payment you have chosen. You can usually choose from many forms of annuity payments. You might choose payments that continue as long as you live, or as long as either you or your spouse live, or payments that continue for a set number of years.
Death Benefit
Annuities provide a variety of death benefits. The most common death benefit is either the guaranteed minimum value or the value determined by the index-linked formula.
Tax Deferral
Federal income tax on interest accumulated in an annuity is deferred until you take the interest out of the annuity. You may be required to pay taxes then on the tax-deferred accumulation. You may have to pay a tax penalty if you withdraw the accumulation before you are age 59½. The advantage of tax deferral is that you will probably be in a lower tax bracket in retirement than while you are employed. Also, during the accumulation period, you will be earning interest on money that you would otherwise have used to pay taxes. Tax-qualified annuities are subject to different rules. In any case, you should consult your own tax advisor.
HOW DO I KNOW IF AN EQUITY-INDEXED ANNUITY IS RIGHT FOR ME?
The questions listed below may help you decide which type of annuity, if any, meets your retirement planning and financial needs. You should consider what your goals are for the money you may put into the annuity. You need to think about how much risk you're willing to take with the money. Ask yourself:
How long can I leave my money in the annuity?
What do I expect to use the money for in the future?
Am I interested in a variable annuity with the potential for higher earnings that are not guaranteed and willing to risk losing the principal?
Is a guaranteed interest rate more important to me, with little or no risk of losing the principal?
Or, am I somewhere in between these two extremes and willing to take some risks?
HOW DO I KNOW WHICH EQUITY-INDEXED ANNUITY IS BEST FOR ME?
As with any other insurance product, you must carefully consider your own personal situation and how you feel about the choices available. No single annuity design may have all the features you want. It is important to understand the features and trade-offs available so you can choose the annuity that is right for you. Keep in mind that it may be misleading to compare one annuity to another unless you compare all the other features of each annuity. You must decide for yourself what combination of features makes the most sense for you. Also, remember that it is not possible to predict the future market behavior of an index.
QUESTIONS YOU SHOULD ASK YOUR AGENT OR THE COMPANY
What is the guaranteed minimum interest rate?
What charges, if any, are deducted from my premium?
What charges, if any, are deducted from my contract value?
How long is the term?
What is the participation rate?
For how long is the participation rate guaranteed?
Is there a minimum participation rate?
Does my contract have a cap?
Is averaging used? How does it work?
Is interest compounded during a term?
Is there a margin, spread, or administrative fee? Is that in addition to or instead of a participation rate?
Which indexing method is used in my contract?
What are the surrender charges or penalties if I want to end my contract early and take out all of my money?
Can I get a partial withdrawal without paying charges or losing interest? Does my contract have vesting?
Does my annuity waive withdrawal charges if I am confined to a nursing home or diagnosed with a terminal illness?
What annuity income payment options do I have?
What is the death benefit?
FINAL POINTS TO CONSIDER
It is very important that you choose an annuity that you understand well. The purpose of this Buyer's Guide is to help you to understand your annuity. Your agent or insurance company can guide you. Remember that the quality of service you can expect from the company and the agent should also be important to you when you buy an annuity.
When you receive your contract, read it carefully. It may offer a "free look" period for you to decide if you want to keep the contract. Ask your agent or insurance company for an explanation of anything you don't understand. If you have a specific complaint or can't get the answers you need from your agent or company, contact your state insurance department.
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Recent Client Question? www.legacyannuities.com
Benefits of an Index annuity?
Protect Your Assets from a Falling Stock Market
Most investors seem to want the same things--a high return and no risk of loss. While this combination is hard to come by, in this article, I'll tell you about an investment that comes as close as possible.
The investment works as follows:
1. You deposit a sum of money into an annuity.
2. Your return is based on the average of the increase in the S&P 500 index for the year. For example, if the S&P 500 index is 1000 at the beginning of the year, and the closing S&P at the end of each month averages 1100, your return is 10%.
3. If the market goes down, your account does not fall, you simply earn $0 and preserve your account value.
4. At the end of the fixed period, you are guaranteed a certain sum back that is larger than your initial deposit, even if the stock market has declined every year. Thus, we have an investment that goes up with the stock market yet does not go down when the market does.
The investment is called an Aindex annuity@ and many insurance companies are offering some version of this fixed annuity.
Here is how I see it:
Your stocks have grown nicely over the past few years. In fact, from a low of 1751 after the 1987 crash, the Dow Jones Average has soared to over 11,000. You may feel it's time to protect some of your profits.
For some investors it may be wise to take cash out of the stock market and park it in the index annuity. If the market continues up, you participate in the climb (although your gain will most likely not be as great as investing directly in an S&P 500 index fund). However, if the market turns around and heads down, you have protected your original principal. And by the way, because it=s an annuity, your growth is all tax deferred and the original principal is guaranteed by the issuing insurance company
Benefits of an Index annuity?
Protect Your Assets from a Falling Stock Market
Most investors seem to want the same things--a high return and no risk of loss. While this combination is hard to come by, in this article, I'll tell you about an investment that comes as close as possible.
The investment works as follows:
1. You deposit a sum of money into an annuity.
2. Your return is based on the average of the increase in the S&P 500 index for the year. For example, if the S&P 500 index is 1000 at the beginning of the year, and the closing S&P at the end of each month averages 1100, your return is 10%.
3. If the market goes down, your account does not fall, you simply earn $0 and preserve your account value.
4. At the end of the fixed period, you are guaranteed a certain sum back that is larger than your initial deposit, even if the stock market has declined every year. Thus, we have an investment that goes up with the stock market yet does not go down when the market does.
The investment is called an Aindex annuity@ and many insurance companies are offering some version of this fixed annuity.
Here is how I see it:
Your stocks have grown nicely over the past few years. In fact, from a low of 1751 after the 1987 crash, the Dow Jones Average has soared to over 11,000. You may feel it's time to protect some of your profits.
For some investors it may be wise to take cash out of the stock market and park it in the index annuity. If the market continues up, you participate in the climb (although your gain will most likely not be as great as investing directly in an S&P 500 index fund). However, if the market turns around and heads down, you have protected your original principal. And by the way, because it=s an annuity, your growth is all tax deferred and the original principal is guaranteed by the issuing insurance company
Recent Client Question? www.legacyannuities.com
What is an Index Annuity?
Understanding Index Annuities
Up until just a few years ago, there were only two types of annuities. The first type, fixed annuities, guarantee the investors principal and pay a fixed rate of interest each year. These annuities, similar to investing in a certificate of deposit, are for more conservative investors. The other type of annuity, allows the investor to select from investment "sub accounts" which rise and fall with the stock and bond markets. These investors typically desire higher returns that come from exposure to the stock market and they are willing to take more risk.
A few years ago, the insurance industry developed a hybrid, called the index annuity, which seems to offer the best of both worlds. The investor's original investment is guaranteed and most index annuities also guarantee a minimum rate of annual interest (3% currently). However, the actual return is based on the increase in the stock market (as measured by the S&P 500). Some investors have said, "It's like having your cake and eating it too!" They like the combination of a principal guarantee plus the opportunity to participate in the stock market.
In return for the guarantee of your principal, you receive only partial participation in the stock market. For example, let's say the S&P rises 20%. You would receive 60% of that amount, or 14% added to your annuity balance. So in return for safety of your investment, you give up some of the increase in the stock market. If the market declined, your principal would have no loss as it is guaranteed. For many retirees and people approaching retirement, this opportunity to earn double-digit returns without risk, is a very good tradeoff. For a brochure, please check off on the attached coupon.
Nothing herein is intended to be legal or tax advice. Readers are encouraged to consult their accountant or attorney. Mention of a particular investment should not be considered a recommendation. Recommendations can only be made by determining your suitability. Past performance is not a guarantee of future results and no investment strategy can guarantee positive returns. Any rates quoted herein are subject to change. The S&P 500 and Dow Jones Industrial Averages are weighted, unmanaged indexes. Mutual fund performance figures are from Morningstar Principia as of 12/31/98. Stock market measurements are taken from Ibbotson and Associates 1998 Yearbook. Performance measurements of the Dow 5, 10, Fair Value portfolio and mutual funds are as of 12/31/98 (unless otherwise stated) and include reinvested dividends and are before deductions for management fees or transaction costs.
What is an Index Annuity?
Understanding Index Annuities
Up until just a few years ago, there were only two types of annuities. The first type, fixed annuities, guarantee the investors principal and pay a fixed rate of interest each year. These annuities, similar to investing in a certificate of deposit, are for more conservative investors. The other type of annuity, allows the investor to select from investment "sub accounts" which rise and fall with the stock and bond markets. These investors typically desire higher returns that come from exposure to the stock market and they are willing to take more risk.
A few years ago, the insurance industry developed a hybrid, called the index annuity, which seems to offer the best of both worlds. The investor's original investment is guaranteed and most index annuities also guarantee a minimum rate of annual interest (3% currently). However, the actual return is based on the increase in the stock market (as measured by the S&P 500). Some investors have said, "It's like having your cake and eating it too!" They like the combination of a principal guarantee plus the opportunity to participate in the stock market.
In return for the guarantee of your principal, you receive only partial participation in the stock market. For example, let's say the S&P rises 20%. You would receive 60% of that amount, or 14% added to your annuity balance. So in return for safety of your investment, you give up some of the increase in the stock market. If the market declined, your principal would have no loss as it is guaranteed. For many retirees and people approaching retirement, this opportunity to earn double-digit returns without risk, is a very good tradeoff. For a brochure, please check off on the attached coupon.
Nothing herein is intended to be legal or tax advice. Readers are encouraged to consult their accountant or attorney. Mention of a particular investment should not be considered a recommendation. Recommendations can only be made by determining your suitability. Past performance is not a guarantee of future results and no investment strategy can guarantee positive returns. Any rates quoted herein are subject to change. The S&P 500 and Dow Jones Industrial Averages are weighted, unmanaged indexes. Mutual fund performance figures are from Morningstar Principia as of 12/31/98. Stock market measurements are taken from Ibbotson and Associates 1998 Yearbook. Performance measurements of the Dow 5, 10, Fair Value portfolio and mutual funds are as of 12/31/98 (unless otherwise stated) and include reinvested dividends and are before deductions for management fees or transaction costs.
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