While much of the discussion regarding indexed annuities involves their accumulation potential, one of the principal reasons for purchasing an annuity is the ability to receive a lifetime stream of income. Annuity income is determined by age, gender, and the insurance company’s projection of interest rates at the point income begins. In a traditional fixed annuity, the terms set at the start of the income stream remain in effect for the lifetime of the annuitant. If rates are low when payments commence, income will not change, even if rates go up.
In contrast, some indexed annuities permit their indexed crediting options to be applied during the accumulation phase and when receiving income. This allows the annuitant to receive a guaranteed lifetime income that may increase: if the index shows a negative return, the payment remains the same; if it goes up, so does monthly income. This feature means favorable market performance in the future can be reflected as higher payments–for a lifetime.
The combination of multiple crediting formats in indexed annuities and the ability to reallocate annually–including using several different strategies at once–exponentially increases the complexity for consumers. And while the opportunities for gain are higher than fixed-interest products, it is also possible that returns might not match those from guaranteed accounts. Backward-looking studies of historical returns for indexed annuities show mixed results, primarily because so much is dependent on the cap and crediting formulas. In general, when market-value returns are trending upward, indexed accounts deliver returns above guaranteed rates. In prolonged downturns, indexed accounts may lag fixed-interest products, but again, no indexed account incurs a loss.
Consumers apparently like the indexed concept, at least while interest rates are low. LIMRA, a life insurance marketing and research company, noted that purchases of indexed annuities have set records each year since 2009, and in a Fall 2012 report, the research firm Moore Market Intelligence projected that indexed annuity sales would exceed fixed annuity sales by 2015. Institutional investors, including private-equity firms, are also entering the market, either as buyers or providers of indexed products.
Is there an indexed insurance product in your future?
The demise of company pensions, coupled with the surge of baby boomers into retirement, is prompting many Americans to consider guaranteed insurance products to provide retirement benefits. Conceptually, indexed insurance instruments seem to occupy an attractive middle ground: potential for gain, no risk of loss, flexibility in allocation, and lifetime income. However, these multi-faceted characteristics also add complexity to consumers’ financial lives–and the potential for error or less-than-optimal results.
The no-loss feature in indexed products is attractive, particularly for retirees seeking income. However, time-tested accumulation strategies using a blend of market-based and fixed-interest vehicles should be considered as well, since they have historically delivered positive long-term results. Stronger industry oversight encourages potential purchasers of indexed insurance products to carefully consider their unique features and costs. Given the range of features and numbers of companies entering the market, consultation with trusted professionals is prudent. Indexed insurance products have passed the fad stage, and are definitely a hot trend in the financial services marketplace. But they are not one-size-fits-all products; effective use requires careful consideration of your unique circumstances
(Variable Annuities and their underlying variable investment options are sold by prospectus only. Prospectuses contain important information, including fees and expenses. You should read the prospectus carefully before investing or sending money. Clients should consider the investment objectives, risks, fees, and charges of the investment company carefully before investing. The prospectus contains this and other important information. A prospectus may be obtained by contacting your financial professional.
Annuity contracts contain exclusions, limitations, reductions of benefits, and terms for keeping them in force. Your licensed financial professional can provide you with complete details.
Variable annuities are long-term investment vehicles that involve certain risks, including possible loss of the principal amount invested. The investment return and principal value may fluctuate so that the investment, when redeemed, may be worth more or less than the original cost. Withdrawals of taxable amounts will be subject to ordinary income tax and possible mandatory federal income tax withholding. If withdrawals are taken prior to age 59 ½, a 10% IRS penalty may also apply. Withdrawals affect the variable annuity’s death benefit, cash surrender value, and any living benefits and may also be subject to a contingent deferred sales charge.
All guarantees associated with an annuity are backed by the claims-paying ability of the issuing insurance company.)
Elozor Preil, RICP®, CLTC is Managing Director at Wealth Advisory Group and Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). He can be reached at [email protected].
See www.wagroupllc.com/epreil for full disclosures and disclaimers. Guardian, its subsidiaries, agents, or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.
By Elozor M. Preil
