Monday, March 22, 2004
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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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