Bar News - August 10, 2007
NHBA Insurance Annuities – A Primer, Part 4
By: Suzanne Morand
Equity-indexed annuities are newer products in the annuity world. When you fund these annuities, 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 and the return rates will vary. Even with a guaranteed return, you can still lose money if the guarantee is based on an amount that’s 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. After the accumulation period, the insurance company will make periodic payments to you under the terms of the contract as with other types of annuities.
These annuities are complicated products that may contain several features that can affect your return:
- Participation rates – this 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 70% and the index increased 10 percent, the return credited to your annuity would be 7 percent (10percent x 70 percent = 7 percent).
- Interest Rate Caps – some set a maximum rate of interest that the equity-indexed annuity can earn. If the contract has a cap of 6% and the index linked to the annuity gained 7%, only 6% would be credited to the annuity.
- Margin/Spread/Administrative Fee – The index-linked interest for some annuities is determined by subtracting a percentage for 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 10%, the return credited to the annuity would be 7%.
- Another feature that impacts the return is the annuity’s indexing method. Some common methods are:
- Annual Reset (or Ratchet). This method credits index-linked interest based on any increase in index value from the beginning to the end of the year.
- Point-to-Point. This method credits index-linked interest based on any increase in index value from the beginning to the end of the contract’s term.
- High Water Mark. This method credits index-linked interest based on any increase in index value from the index level at the beginning of the contract’s term to the highest index value at various points during the contract’s term, often annual anniversaries of when you purchased the annuity.
In summing up, annuities are great products that can be tailored to meet your financial goals but you must be sure to do your homework and understand the product fully before you buy.
If you have questions regarding annuities or other life insurance products, please contact Sue Morand of NHBA Insurance Agency at 866-642-2292 or via e-mail at firstname.lastname@example.org.