Annuities

Did you invest in an equity indexed annuity  a few years back? If you bought it seven years ago, the maturity date may be approaching fast, and you might only have a small window of time to decide whether to renew the annuity or place your money elsewhere.

If you look at what has happened to annuity rates and the markets since you bought your equity indexed annuity, you may understand why the specifications for a new contract might differ. Interest rates are at a four-decade low, and the markets have swung wildly. Therefore, there’s a good chance that you will see lower market participation rates and lower maximums (caps) on amounts credited to your equity indexed annuity. In addition, you may have to make a longer-term commitment on your new contract.

The company might now have the ability to change participation and cap rates on the annual anniversary dates, whereas, your original contract may have kept the same numbers throughout the term. However, this could work in your favor. Because if the equity markets become less volatile, there’s the chance that index option premiums will decrease, thus allowing annuity companies to offer higher annual participation levels and caps.

Times have changed and many of our investments have as well, and a new equity indexed annuity might not be identical to the one you bought before. Nevertheless, it will still provide the same opportunity for tax-deferred growth and the other features that encouraged you to make your original purchase. 

Remember that you don’t need to stay with the same annuity company or the same type of annuity.  You can 1035 exchange your annuity with surrender charge at maturity for an equity indexed annuity with another company, a traditional fixed annuity or a variable annuity.

 Note: There may be risks with equity index annuities that include, but are not limited to, the fact that the return is calculated at the end of the vesting period; often, the investor cannot access cash prior to the end of the vesting period without restriction; if the index performs well, low interest rates are irrelevant; each annuity is subject to fees and charges; and withdrawals may be subject to surrender charges. These restrictions have an impact on performance and must be considered when deciding to purchase or exchange the annuity.

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When the markets are volatile and the interest rates low, investors turn to relative safer investment options such as an index annuity. Let us quickly try to understand the term and what are the advantages and disadvantages of investing in this kind of an investment vehicle. An Index annuity is an investment vehicle which is closely linked to some leading index such as the S&P 500. If the stocks rise then investors benefit from the rise in stock prices. If the stock markets fall, investors are safeguarded against the falling stocks which assure a minimum return of 3%.

This is the biggest advantage of an index annuity. While on one hand an investor gains from rising stocks a falling market does not erode the base capital and still ensures a small return. Financial institutions which have annuity products make their money from the spreads. In a rising market they make more profits than what is passed down to the investor. The profits so accrued during a bull market are used to compensate investors during a bear phase.

The index annuity is a relatively newer product in the annuity space. Earlier annuity products only varied around variable equities and fixed annuities which invested the funds in secure investment vehicles.  Index annuities are good investment vehicles for investors who have a long term investment horizon. Of all the products that are offered by annuity companies the investments have a lengthy time frame (5 years or more).  So if an investor is ready to invest for a long term then index annuities can be a good bet.  There are features such as the “annual reset” rate which is used to lock-in the rate of interest.  In other words the financial institution which is issuing the annuity product has a cap on the interest rates in times of bull phases.

The index annuity is an investment vehicle which is good for investor who have moderate to high risk appetite.  There may be instances when an equity market may go for a prolonged “bear” phase. In these kind of scenarios the returns that are generated from the equity will be consistently low over a period of time.  Investors who have sudden requirement of funds may want to withdraw the investments that have been already made into an index annuity fund. The investor may have to pay charges for early withdrawal. Before buying an index annuity an investor should be aware of all the features of the product before taking the plunge.

Companies selling index annuities will offer features which may not be significantly different. However, when buying a product an investor should look for features which suit their individual requirements.  Representatives may try to hard-sell a product but as investors we need to take informed decisions.  An index annuity product may be a good fit for a young investor who wants to invest in for securing financial needs after retirement.  Of other annuity products available in the market,  an index annuity can give good returns in the long-term. So, do your study before you make the choice. Get help from an experienced retirement advisor who can help you compare several offerings.

But the current timing makes the index annuity a particularly opportune retirement option because if the market jumps from these low levels, you share in the gain yet you have protection of your principal if the market slumps.  Select a very solid insurance company, rated AA or AAA by Standard and Poors.

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