What are fixed equity-indexed annuities?
An equity-indexed annuity is an extremely complex type of annuity. Although it is called a “fixed” equity-indexed annuity, it shares characteristics with both immediate and variable annuities. The return rate of an equity-indexed annuities varies more than that of a fixed annuity, but is not as irregular as payouts from a variable annuity.
The payouts of an equity-indexed annuity vary in accordance with the performance of investments – usually bond or equity mutual funds. An equity-indexed annuity can be immediate or deferred. An equity-indexed annuity can be a type of variable annuity. Whereas variable annuities allow for different types of investments of funds, equity-indexed annuities determine interest rate based on an equity index – for example, the S&P 500.
n an equity-indexed annuity, various percentages of the premium are allocated to different investments. Buying an equity-indexed annuity is very similar to investing in the stock market. Investors use a prospectus to determine which investments are most likely to produce high interest rates and gains.
In an equity-indexed annuity, the client or the insurance agency chooses to invest the premium in a variety of investment options: typically mutual funds that invest in stocks, bonds, money market instruments, or any combination of the above. The periodic payouts of the annuity then vary depending on the performance of the investments.
What are some features of an equity-fixed annuity?
Equity-indexed annuities have most of the same features of a non-variable annuity, depending on whether they are immediate or a deferred annuity. Like a fixed annuity, equity-indexed annuities are tax-deferred and provide periodic payouts after a client’s initial premium investment.
What are some risks of equity-fixed annuities?
The most apparent risk associated with variable annuities is the risk that the investments on which your payouts rely do poorly, thus reducing the value of the payouts. However, there are other significant risks associated with variable fixed annuities. Most of these have to do with the huge amount of fees – often hidden – that are linked to equity-fixed annuities.
Like those of deferred annuities, equity-fixed annuity contracts usually contain high surrender charges. If you decide to cancel the contract or withdraw your premium, it usually comes at a high cost. Sellers of a fixed annuity often receive commissions of 5% or more, encouraging them to sell these annuities quite aggressively.
Two risks associated specifically with equity-fixed annuities are mortality and expense risk charges and administrative fees. The mortality and expense risk charge is “compensation” to the insurance agency for the insurance risks it undergoes. This charge is also sometimes used to pay a commission to the annuity salesperson. The mortality and expense risk charge tends to be around 1.25% of the premium. Administrative fees associated with variable annuities are fees for record-keeping and maintenance, which total around .15% of the premium.
Another risk associated with an equity-indexed annuity is the Early Withdrawal Penalty. This is incurred if the client chooses to withdraw any funds before the age of 59.5. The result is a 10% tax penalty.
Many equity-indexed annuities often include annual fees that fall between 1-3% of the premium.
Equity-fixed annuities can promise more than they return. Because of caps and hidden fees, equity annuities often do not produce returns as high as their investments. In 2009, equity-indexed annuities that invested in a 500-stock index with a 26% gain would only receive a 6.5% payout increase. This is due to caps and fees that are often hidden in the contract and use complex terminology.
Because equity-fixed annuities are insurance products and not “securities,” they are not required to disclose ways to decipher hidden fees and costs or to easily view where the premium is invested and how the investments are performing. This results in the client having very little information about the investments and their relation to the performance of the annuity itself.
Equity-indexed annuity and the elderly:
Equity-indexed annuities are one of the most complex types of annuity available because they require in-depth knowledge of stocks, bonds, money market instruments, and other investments. Unfortunately, insurance companies try to send out the exact opposite message. By framing a fixed annuity as simple high-reward investments, insurance agencies and annuity salespeople attract clients who do not know how to decipher the complexities of a variable or equity-indexed annuity. Having an uninformed client base allows the agency or salesperson to take advantage of their clients by charging high fees and commissions. Usually, equity-indexed annuities do result in some growth, which leads the client to believe they are doing well. Yet, the fixed annuities consistently under perform with relation to their investments, which means that the clients are not receiving all their profits.
Elderly clients are as equally disadvantaged as younger people who are not well-versed in investment theory and terminology, but tend to be more targeted due to their stable and accumulated income and their tendency to search for retirement options.
However, equity-indexed annuities are almost never the right option for the elderly, due to exorbitant fees and charges and the complexity of the investment process.
What are some companies that sell equity-indexed annuities to senior citizens?
The following companies are some top sellers of an equity-indexed annuity:
- Allianz Life of North America
- American Equity Investment Life
- New York Life