Equity Indexed Annuity
A fixed indexed annuity has attributes of both a traditional fixed and a variable annuity account. Technically, this annuity is categorized as a fixed annuity account by insurance regulators. Investors never own stocks, bonds, mutual funds or any other variable instrument in an indexed account. This significant difference can be advantageous for conservative minded consumers.
Accounts that do not Lose Value
The stock market has been very unpredictable and extremely volatile over the last several years. Overall, consumers recently lost millions during the “dot-com bubble” and they are now worried about the possibility of economic recession. Fixed indexed accounts avoid losses during market corrections, but credit interest during market upswings.
Equity indexed (also referred to as fixed indexed) annuities are unique in the manner in which they credit interest. Traditional fixed annuities credit interest daily based on the internal returns of the insurance company’s portfolio. Indexed accounts do not credit portfolio interest daily. The insurance company uses the same interest returns normally credited in a traditional fixed account to purchase an option contract. The option contracts are tied to the S&P 500, Dow Jones, NASDAQ or other chosen market index.
How do Indexed Accounts Work?
If the market index (S&P 500 for example) increases over a predetermined period of time, usually one year, then the option will increase as well. In this example, at then end of one year, the indexed annuity account will credit interest to the account holder based on the increased value of the S&P 500 option contract.
In contrast, if the option lost value over the one year period, then no interest would be credited to the annuity account – the option has expired without value. To simplify this point, the annuity investor is only investing their potential interest each year, but their principal and gains from prior years are never at risk. Thus, the account either increases or maintains value, but any interest gains are locked in and cannot be lost in subsequent years.
Indexed Advantages - Investment Options
Indexed accounts were designed to credit higher returns than traditional fixed annuity accounts. In many years, indexed accounts have performed very well. It is not uncommon for consumers to receive 7-10% or more with an indexed account during bull markets. There are rare years where interest credits have exceeded 20%. Of course, there are bear market years where there are no gains to be credited to the annuity policy.
It is important to note that many equity indexed annuity contracts also have a sub, fixed account as an investment option. The traditional fixed account can be used in years where the owner is confident that stock indexes will lose value. Rather than wait out negative market cycles offering no returns, the owner can achieve modest gains in the sub account. An annuity investor will usually have the ability to switch funds between one fixed account and several indexed accounts every year depending on the economic outlook.
Are Indexed Annuity Accounts Safe?
All fixed and indexed annuity policies have a minimum guarantee as a safety net. For example, an indexed account might guarantee 3% growth on 90% of the premium invested for a ten year period of time. It should be noted that it is extremely rare for the minimum guarantee to come into play. In almost all cases, the index performance will far surpass the declared minimum guarantee.
All fixed and indexed accounts are backed by the full faith of the insurance company offering them. Additionally, individual states require all insurance companies doing business in their state to contribute to the Life and Health Guaranty Association. State insurance regulators created a pool of money with the Guaranty Association Act to step in should an insurance company fail to meet the obligations of their contract holders. The State Insurance Departments also regularly check each insurance company for solvency before allowing them to sell products such as annuities. In this way, there are two levels of protection; the insurance company itself and the State Department of Insurance for each state.
Summary
In summary, indexed accounts are more aggressive than the traditional fixed annuities they evolved from. They are appropriate for consumers who might not be comfortable with direct exposure to the overall markets, but desire the possibility of significant account appreciation.
Please contact us to receive more information about equity-indexed annuities. We serve several states including Arizona, Florida, Georgia, Indiana, Michigan, Missouri, New Mexico, Nevada, Ohio, Pennsylvania, Texas and others.
