Equity-Indexed Annuities

Equity-indexed annuity products are sold by insurance agents, frequently by those who do not possess a securities license, but want to offer clients the ability to invest in a financial product that provides tax deferred growth that is somehow tied to the stock market. The sales pitch emphasizes the upside of the stock market for investors without the downside. Index annuity products offer a guaranteed minimum rate of return if the index annuity is held for the life of the contract, with many contract periods between 8-15 years. Remember the “sales pitch” axiom, “if it sounds too good to be true, it probably isn’t” when you weigh investments decisions related to equity-indexed annuities because many investors don’t appreciate the fact that insurance company charges substantial fees from the contract to pay for this “downside protection.”

Equity-indexed are different than fixed and market value adjusted annuity contracts because the interest rate credited to the account balance is linked to a stock market index or basket of stock indexes. The methods of calculating the linkage between the index and interest rate credited to the annuity contract is determined by many factors including:

  • indexing method (annual reset, point to point, high water);
  • participation rate (current or guaranteed);
  • interest rate cap (current or guaranteed); and
  • minimum guaranteed rate.

Retired and elderly investors should ask the following questions:

  • What is the guaranteed minimum return?
  • How good is the guarantee?
  • What is a market index?
  • Can I get my money when I want?
  • Is it possible to lose money in an equity-indexed annuity?

Answers to these questions and other details concerning what regulators considered to be a “complex” product are often minimized or not disclosed which can represent fraudulent misrepresentation or omission of material facts when the motive may be due to conflicts of interest when the agent’s compensation is taken into consideration. The commissions paid for the sale of some equity-indexed annuity products can range between 8% – 12% of the premium payment. The higher the commission paid, the higher the commission and consequently the longer the surrender period for equity-indexed annuities. These significant surrender charges with extended surrender charge periods is an important reason why many consider recommendations that retired and elderly investor invest in these annuities above certain ages should be unsuitable investment advice because the surrender periods extend beyond their life expectancies. Insurance companies market these products because they are very profitable for the insurance company producing huge profits during years of market increases.

It is important to determine what percentage of your investment portfolio should be invested in Equity-Indexed Annuities based on your investment objectives, risk tolerances and investment time horizon.

Investors are advised to seek competent financial, tax and legal advice concerning the decisions they make with their investments. KlaymanToskes can provide you with a free consultation concerning any securities industry violations related to the handling of your investments accounts by a full-service brokerage firm or registered investment advisor. Information contained on this webpage is for educational purposes only and should not be considered legal advice. No Information contained on this website creates an attorney-client relationship.

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