Equity
Indexed Annuity
What is
an equity-indexed annuity?
An equity-indexed
annuity is a special type of contract between you and
an insurance company. During the accumulation period when
you make either a lump sum payment or a series of payments
the insurance company credits you with a return that is
based on changes in an equity index, such as the S&P
500 Composite Stock Price Index. The insurance company
typically guarantees a minimum return. Guaranteed minimum
return rates vary. After the accumulation period, the
insurance company will make periodic payments to you under
the terms of your contract, unless you choose to receive
your contract value in a lump sum.
Can you
lose money buying an equity-indexed annuity?
You can
lose money buying an equity-indexed annuity, especially
if you need to cancel your annuity early. Even with a
guarantee, you can still lose money if your guarantee
is based on an amount that is less than the full amount
of your purchase payments. In many cases, it will take
several years for an equity index annuity's minimum guarantee
to break even.
You also
may have to pay a significant surrender charge and tax
penalties if you cancel early. In addition, in some cases,
insurance companies may not credit you with index-linked
interest if you do not hold your contract to maturity.
What are
some of the contract features of these annuities?
Equity-indexed
annuities are complicated products that may contain several
features that can affect your return. You should fully
understand how an equity-indexed annuity computes its
index-linked interest rate before you buy. An insurance
company may credit you with a lower return than the actual
index gain. Some common features used to compute an equity-indexed
annuity's interest rate include:
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Participation
Rates. The participation rate determines how
much of the index’s increase will be used to compute
the index-linked interest rate. For example, if the
participation rate is 80% and the index increases
9%, the return credited to your annuity would be 7.2%
(9% x 80% = 7.2%). |
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Interest
Rate Caps. Some equity indexed annuities set
a maximum rate of interest that the equity-indexed
annuity can earn. If a contract has an upper limit,
or cap, of 7% and the index linked to the annuity
gained 7.2%, only 7% would be credited to the annuity. |
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Margin/Spread/Administrative
Fee. The index linked interest for some annuities
is determined by subtracting a percentage from any
gain in the index. This fee is sometimes called the
margin, " spread," or administrative fee.
In the case of an annuity with a " spread "
of 3%, if the index gained 9%, the return credited
to the annuity would be 6% (9% - 3% = 6%). |
Equity
indexed annuities combine features of traditional insurance
products (guaranteed minimum return) and traditional securities
(return linked to equity markets). Depending on the mix
of features, an equityindexed anuity may or may not be
a security. The typical equity-indexed annuity is not
registered with the SEC.
Securities
and Exchange Commission
Office of Investor Education and Assistance
100 F Street, N.E.
Washington, D.C. 20549-0213
www.sec.gov/investor/pubs/equityidxannuity.htm
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