You
own an indexed annuity. Is it worth keeping?
If you own a traditional, non-indexed
fixed annuity, it’s not hard
to decide if it is worth keeping. You
can compare your current interest rate
with what is available in other annuities,
while also taking account of any surrender
charge that you would have to pay.
Indexed annuities are much more complicated.
The interest that you earn is tied to the
performance of a financial index, such
as the S&P 500 stock index, and there
are many different crediting methods. You
also have to consider the guaranteed minimum
interest rate and any surrender charge.
The future value of an indexed annuity
is much harder to predict than the future
value of a traditional fixed annuity. If
you want to make an informed decision about
whether your indexed annuity is worth keeping,
you need to look at the range of possible
results.
We give you that information in a What
Should I Do With My Indexed Annuity? report. Our goal is to help you avoid the
dual mistakes of keeping an indexed annuity
that you should get out of, or getting
out of an indexed annuity that you should
keep.
What is an indexed annuity?
An annuity is a contract with
a life insurance company that provides
an income for a fixed period or for life. If
the contract is an immediate annuity (also
called an income annuity or a payout
annuity), the income begins soon after
the contract is issued. If the contract
is a deferred annuity, the income
begins at the end of an accumulation period,
which can last for many years. Most people
who buy a deferred annuity do not choose
to receive regular income payments; instead,
they cash out and receive the contract’s
value as a lump-sum payment, or they periodically
withdraw a portion of the contract’s
value.
Annuities can also be variable or fixed. If
the contract is a variable annuity,
the growth in the value depends upon the
gains or losses of the investments (called subaccounts)
that you choose; in this respect, a variable
annuity is similar to a family of mutual
funds.
If the contract is a fixed annuity,
the growth in the value depends upon the
interest rate that the insurance company
credits each year. An indexed annuity (also
called an index annuity or an equity-indexed
annuity or a fixed index annuity or
a fixed indexed annuity) is a
deferred fixed annuity with an interest
rate that is based upon the performance
of a financial index, such as the S&P
500 stock index. In addition, the credited
interest rate cannot be less than a guaranteed
minimum rate, regardless of the performance
of the index.
Why is it hard to decide what to do with
an indexed annuity?
It’s hard because you have to take
many factors into account to get a picture
of whether the annuity is likely to be
a good investment. These factors include:
the
possible future values of the index;
the formula that translates the change
in the value of the index into the interest
rate that is credited to your contract;
the guaranteed minimum interest rate;
the current and future surrender charges;
your current and future marginal tax
rates;
the probability of the owner’s or
annuitant’s death each year;
and
your current contract values, including
the guaranteed minimum value, the value
for each indexed account and your tax
basis.
What will a What
Should I Do With My Indexed Annuity? report
tell me?
We use simulation techniques to create
thousands of possible future values for
your annuity, and then we tabulate the
results. You can use these projections
to help you make these decisions:
Should I keep my annuity, or should I get out
of it? We give you five-year and 15-year projections
of your annuity’s after-tax surrender value
versus the after-tax value of two benchmarks, representing
alternative investments.
Should I take a penalty-free withdrawal? We
give you a 10-year projection of the after-tax value
of taking a withdrawal now and investing it elsewhere
versus taking a withdrawal later.
How much does your service cost?
A What Should
I Do With My Indexed Annuity? report costs $495 for the first indexing
strategy, plus $125 for each additional
indexing strategy that you want us to analyze.
For example, if your annuity gives you
a choice of two indexing strategies, such
as monthly averaging or annual point-to-point,
the cost to evaluate both strategies would
be $620. We prepare a separate report for
each strategy.
Discounts for small annuities and for multiple
orders can be negotiated.
What can I expect to receive?
Here's a sample report.
When we prepare a What
Should I Do With My Indexed Annuity? report for you, we
do not just input data, push a button
and print. We have to think about what
we’re doing. Indexed annuities do not
have a standard design, so we have to
create a simulation model that reflects
the features of your annuity. We may
have to use our own judgment if some
items of information are missing. We
also review our results to make sure
that they seem reasonable.
What documents do you need from me to prepare
a report?
We need a copy of your annuity
contract (please do not send the original)
and your latest annual statement. It
is also helpful to have a copy of annual
statements from earlier years, if you
have them.
You can also tell us the assumptions
that you would like us to use in preparing
the report. You can specify tax rates,
benchmark rates of return, parameters
of the probability distribution of index
values and nonguaranteed interest-crediting
factors, such as participation rate,
spread and cap. If you prefer not to
specify your own assumptions, we will
use assumptions that seem reasonable
to us, with an explanation.
How likely is it that I will benefit from
your service?
Most indexed annuities have a surrender
charge that lasts many years, and it
is usually not obvious whether it makes
sense to keep the annuity or pay the
surrender charge and get out. Even if there
is no surrender charge, it may not be easy
to judge the merits of the annuity by reviewing
the interest-crediting formula. If your
annuity offers more than one interest-crediting
strategy, you may find it difficult to
decide which one to choose.
The simulation methodology used in a
What Should I
Do With My Indexed Annuity? report will give you a better picture
of your options, including the option
of taking a penalty-free withdrawal.
What are the limitations of your service?
We must necessarily make assumptions
about future index values, tax rates
and nonguaranteed interest-crediting
factors to prepare the simulations.
We also ignore the value of some features,
including guaranteed annuity options, living
benefit riders, avoidance of probate
and protection from creditors.
These features are explained in the report,
and we encourage you to consider them
when you make a decision about what to
do with your indexed annuity. We can
crudely take them into account in the
simulations by reducing the benchmark
rates of return, using your own specified
adjustment.
Can I get a report for an indexed annuity
that I am thinking of buying?
Our service is intended to help people
who have already bought an indexed annuity.
If you are thinking of buying an indexed
annuity, you should start by reading
these documents:
Craig McCann and Dengpan Luo, “An
Overview of Equity-Indexed Annuities,” Securities
Litigation & Consulting Group, February
2006 (www.slcg.com)
NASD, “Equity-Indexed Annuities — A
Complex Choice,” June 30, 2005
(www.nasd.com/InvestorInformation/InvestorAlerts/index.htm)
You can easily find critical commentary
about indexed annuities by doing a search
on the Internet.
If you still want to buy an indexed annuity,
you can order a What
Should I Do With My Indexed Annuity? report for the product
that you are considering. We will
need a specimen contract and a copy of
the sales information that you have received.
Where can I get more information about indexed
annuities?
Here are some websites that provide information
about indexed annuities:
Advantage Compendium
www.indexannuity.org
National Association for Fixed Annuities
www.nafa.us
National Association of Insurance Commissioners
www.naic.org
www.idfpr.com/DOI/life_annuities/equityindex.asp
NASD
www.nasd.com
www.nasd.com/InvestorInformation/InvestorAlerts/index.htm
Securities & Exchange Commission
www.sec.gov
www.sec.gov/investor/pubs/equityidxannuity.htm
What's the next step?
Go to our How
to order page to begin the ordering process or
to set up an appointment to obtain more information.
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