Are you considering
buying an equity-indexed annuity? This brochure explains equity-indexed
annuities and provides resources for obtaining additional information.
What is 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’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.”
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 equity-indexed annuities?
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’s gain. Some common features used
to compute an equity-indexed annuity’s interest rate include:
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%).
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.
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%).
that can have a dramatic impact on an equity-indexed annuity’s
return is its indexing method (or how the amount of change in
the relevant index is determined). Some common indexing methods
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.
This method credits index-linked interest based on any increase
in index value from the beginning to the end of the contract’s
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.
These and other
features may be included in an equity-indexed annuity you are
considering. Before you decide to buy an equity-indexed annuity,
you should understand how each feature works and what impact,
together with other features, it may have on the annuity’s potential
annuities registered with the Securities and Exchange Commission?
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 equity-indexed
annuity may or may not be a security. The typical equity-indexed
annuity is not registered with the SEC.
Who should I contact
if I have a problem?
If you have a problem
with an equity-indexed annuity, you should contact your state
insurance commissioner. In addition, we would also like to
hear from you, although we will likely only have jurisdiction
to resolve your particular issue if your equity-indexed annuity
is a security. You can send us your complaint using our online
complaint form at www.sec.gov/complaint.shtml.
You can also reach us by regular mail at:
Office of Investor Education and Advocacy
100 F Street, N.E.
Washington, D.C. 20549-0213
Where can I find
Before you purchase
an equity-indexed annuity, you should understand how it works,
what factors to consider in making your decision, and how you
can avoid common problems. An “investor
alert” concerning equity-indexed annuities is available on
the NASD’s website.
For more information
about investing wisely and avoiding fraud, please check out the
Investor Information section of our website at www.sec.gov/investor.shtml.