Equity Indexed Annuities - Buyers Guide and Video

About Annuities

Millions of Americans have chosen annuities to help them chart a course toward their long-term financial goals. Annuities are more than just contracts issued by life insurance companies; they are products specifically designed to help meet the needs of people saving for retirement. In their simplest form, annuities are designed to help people accumulate money now in order to create income in the future, generally during retirement.

There are two primary types of annuities - variable and fixed. Variable annuities offer the opportunity to invest in sub-accounts within the contract. The underlying investments in the sub-accounts invest in stocks, bonds, and other investments. An investor’s return will vary based on the performance of the sub-accounts. Variable annuities may provide greater upside potential, but also involve greater downside risk as principal can be lost. For this reason, variable annuities are considered securities and are sold only by prospectus. Fixed annuities, on the other hand, generally provide protection against loss of principal, but have lower upside potential. They earn a stated rate of interest, which is set by the issuing insurance company.

About Indexed Annuities

Indexed annuities are a type of fixed annuity in which the amount of interest credited is tied to the performance of an outside measure, often an equity-based index such as the S&P 500 Index (subject to certain limitations). This indexed interest crediting method provides the opportunity for crediting rates that, depending upon the performance of the relevant index, may be higher than other fixed interest rate alternatives. Since only interest rates are dependent on the outside index, a decline in the index simply results in no interest being paid, rather than a loss of principal or prior earnings (such as would occur with an investment in equities).

Indexed annuities are well suited for people who want to maintain or grow their money without downside market risk. However, it is important to remember that indexed annuities are not securities or stock market investments in any way. They do not directly participate in any stock or equity investments.


Here's a great little flash video from West Coast Life. It illustrates both the general structure of indexed annuities, along with some illustrations on how their own product works. I'm actually a pretty big fan of their product. Its a pure rate cap rate product with no margins, spreads or other costs. The product has a surrender cost in initial years, but overall is a great product for an inconsistent and volatile market.

Watch the video and then either call us at (800)958-0028 or check us out at annuity . net for fixed and equity indexed annuities.

You should also check out their buyers guide for an equity indexed annuity

Howard

Equity Indexed Annuities - Are they suitable - A letter to the Editor

I read your article in the San Diego Union Tribune regarding Equity Indexed Annuities. For the most part, your comments are both accurate and insightful, but perhaps overbroad. Either slamming or promoting EIAs as a broad class is like slamming or promoting mutual funds as a class. Whether a particular product is an appropriate tool depends on the construction of the particular product and the life/financial circumstances of the investor.

An EIA is almost never a good solution for an eighty year old. It is never a decent solution for an eighty year old without sufficient resources to otherwise pay for dentures. Nevertheless, it is often a very solid solution for a 65 year old. A properly constructed EIA is a reasonable solution for someone in the following circumstances:

1. You have a lump sum of cash which can't be replaced through future earnings (eg. retirement savings, inheritance, lotto winnings etc.) and thus are very sensitive to losses of principal. Such funds should generally not be exposed to the market risks of a mutual fund, stock or variable product. An EIA's guaranteed floor can protect against all market risks.
2. You have a lot of years ahead of you and therefore are strongly affected by a diminished interest rate on fixed return investments. Eg. a 65 year old would be ill served by placing money at 2-3% if those funds are targeted to support him 15 years out in his 80s. He could benefit by market oriented growth potential of an EIA. This is less of an issue today as fixed return investment creep up towards the estimated aggregate returns of an EIA. Over shorter terms marginally higher earnings only have a small effect on overall available funds and don't justify the restrictions involved in an EIA or similarly restricted investment.
3. You have other funds available and investable to handle short term needs. (out to about 10 years).

As to choosing an EIA, your comments on the complexity of product design and crediting strategies are again accurate, but again are overbroad. While many products are complicated and have hidden costs, a consumer can do very well with what the industry calls " a simple cap rate product with no moving parts". A clean product will have a simple interest crediting strategy tied to the S&P 500 with no margins or spreads and 100% participation rate with an annual point to point crediting strategy. The only restriction is an interest rate cap of say 8 or 9%. With these products the consumer gets exactly the growth rate of the market with no hidden fees or costs. If the market goes down, the carrier absorbs the loss, if the market goes up the consumer gets all of the growth up to the cap. He in effect exchanges the upper reaches of his growth potential for a guarantee against losses.

In the end, your comments and concerns are realistic but don't really provide the guidance your readers need to properly discriminate between good solutions and bad solutions. An Equity Indexed Annuity is a tool. Built properly and deployed intelligently it is an excellent option for wealth preservation and management. Used improperly it can, like any other financial instrument, be a wealth destroyer.

Howard Witkin
Annuity.Net

Case Study: Guaranteed income for life

I think that the best way to begin talking about Equity Indexed Annuities (EIA) is to start writing about some actual cases I've written. That'll give you a sense of when the product might be a good fit with your life. So here's a case I just did for a family in California:

Pam M. is a 66 year old widow living in Los Angeles. She owns her own home with a mortgage and home equity line. She has about 300,000 in investable assets - mixed amongst CDs and mutual funds, and is drawing down a couple thousand dollars per month for expenses. She is very concerned that the CDs are not producing high enough interest to last forever, and is worried that the money in the market represents too high a risk.

Lets talk about how an EIA might be deployed to help her out.

After an extensive qualifying interview Pam and I agreed on a basic strategy relying on a few fundamental premises:

1. She does not have an immediate need for the bulk of the money, nor does she foresee such a need arising. - This makes a EIA a reasonable choice. Her principal will be locked up for 5 to 14 years depending on the product we choose together. Generally even with a 14 year lockup, she will be allowed to withdraw up to 10% of her invested assets each year, and in an emergency could liquidate more with a penalty somewhere around 10%.

2. Based on her family's history of longevity she could easily live another 30 years. So any investment with a small locked in growth rate (like a 2.5% CD) which might take 30 years to double can't provide enough principal growth to keep up. Since an EIA is structured to grow with the market, a typical product (like the Fidelity and Guarantee Index Rewards ) could track an up market and give 8.5% annual growth or even more. This makes an equity indexed annuity a reasoable fit.

3. She is no longer working, and has no way to replace any lost principal. She can accept NO RISK TO HER PRINCIPAL her initial investment must be protected at all costs. This factor again points to an Equity Indexed Annuity (EIA) as an excellent fit. The product is designed so that in any down year, the insurer takes the loss and the client's account breaks even. Even if the market were to crash and stay down for the duration of the contract, carriers will generally commit to a minimum return of say at least 1.5% per year compounded over the length of the contract.

Together these two points promise a possible solid return with an ironclad guarantee against any loss of principal. The way it is structured the carrier is assuming all of the risk of your investment. In exchange you are giving them full use of your money for an extended time, and you are giving up the potential for high returns in an extremely robust market.

The fundamental tactical approach in picking a great Equity Indexed Annuity is to choose a simple product with mostly fixed parameters, no fees, no costs, no market value adjustments tied to a simple market average. In a volatile market where interest rates are likely to remain at or below the proposed cap, you have the advantage of getting essentially all of the market's growth with none of its risks.

In pam's case, we moved about 150000 into the Fidelity and Guarantee Index Rewards with a 9% cap, no fees, no costs. She's already making money, outperforming her S&P mutual fund (cause here she'll get the full growth without any built in fees). Next article I'll talk about how to compare products.

Equity Indexed Annuities

Equity Indexed annuities are one of the most significant new investment products to hit the market in the last 20 years. They combine the growth potential of the stock market with the principal protection of a CD. An equity indexed annuity, is like an index mutual fund where an insurance company absorbs all of the risk of market drops in exchange for keeping a small part of your portfolio growth in up markets. Unlike mutual funds, there are rarely any management fees, and ALL OF YOUR GROWTH IS TAX DEFERRED (ask your accountant).

I hope to use this blog to help explain and clarify how this financial tool should be used, and offer some insight into when it might fit into your portfolio.

Please offer up your questions and comments so that I can make this a robust and useful resource.

Howard Witkin
hwitkin*at*annuity*dot*net*dot*nospam*

Learn more at
http://www.annuity.net
or
http://www.lifeinsurance.net