Are Equity-Indexed Annuities Riskier?
An equity-indexed annuity offers both guaranteed interest rates (typically between 1% to 3%) as well as market index returns, typically without dividends accounted for, to generate returns that can limit gains considerably.
Multiple contract features can affect the amount of additional index-linked interest credited. These include the indexing method and participation rate.
No.
Fixed index annuities provide investors with an opportunity to earn interest based on the performance of an index such as the S&P 500, while at the same time protecting principal from market downturns. With their promise of both growth and security, equity-indexed annuities are becoming an attractive retirement investing choice.
However, these products do not cater to every investor. Some indexed annuities feature caps which limit how much you can earn each year regardless of how well the index performs; additionally many have fees such as spread fees that deduct a set percentage from any gains linked to your annuity.
Fees associated with these products can add up quickly, diminishing the total interest you can actually receive in the end. Other annuities have predetermined surrender periods which you must meet before withdrawing funds – this period could range anywhere from 15 years or longer; and any attempts at withdrawing your money before its completion could incur penalties and charges that are significant in value.
Churning, or encouraging customers to switch from an indexed annuity to another product, can incur substantial fees and often requires starting the surrender period over from when you made your investment change. Furthermore, this could bring increased costs or reduced benefits that have tradeoffs as a result of such pressure from insurance agents.
Due to their complex structure and associated tradeoffs, indexed annuities may not be right for everyone. To assess if an indexed annuity would work for your specific financial circumstances and needs, consult with professionals. They can help explain all available options as well as selecting those features best suited to you.
Yes.
An equity-indexed annuity allows you to generate interest based on the performance of a market index – usually the S&P 500 – but also provides protection from losses by setting limits on how much the index can decline. An equity-indexed annuity may be an attractive choice for conservative investors but may not provide the same returns as investing directly into that index would.
When evaluating how well an equity-indexed annuity may perform, take note of its participation rate, spread/margin, asset fee and rate caps. These factors impact how much of the index return you actually reap; for instance, if an index rises 10% your gains could be reduced by having a participation rate of 90% and/or a rate cap that limits index-linked interest earnings to 7% respectively.
An important consideration when purchasing an annuity with index-linked interest is how the index is tracked to calculate your index-linked return. EIAs usually use the high-water mark method while some annuities also track it using point-to-point methodology. Either way, knowing how the index is being tracked will allow you to evaluate which products feature those you desire while eliminating those without features that you prefer.
Note that annuity protections aren’t as strong as those found with direct stock market investments; annuities are usually covered by each state’s insurance guarantee fund instead of providing as much security coverage as the FDIC would provide. Therefore, an equity-indexed annuity should only be utilized as part of your retirement savings plan rather than as the sole source of funds. That way, you still gain access to similar retirement accounts through other investment and savings vehicles. To determine whether an annuity is right for you, speak to a fee-only financial advisor. He or she can perform a comprehensive review of your portfolio, goals and risk tolerance to help guide the right choice.
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