Index Annuities: Trick or Treat?
To the people who sell them -- I've sat through a dozen presentations -- index annuities are an investor's treat, a "perfect investment" that goes up with the market but doesn't go down.
To their critics, these annuities are tricks. "They should be outlawed as a fraud on the public," said
Index annuities are insurance products that credit interest based on gains of a market index, such as the Standard and Poor's 500, but protect principal if the index goes down.
They don't invest directly in stocks but combine fixed-income investments and derivatives such as options and swaps tied to an index. That's how they can promise preservation of principal or even a minimum return with the potential for higher gains.
"That's an enticing combination after the markets of the past 10 years," said
Although sales set a record of
As a rule, newer index annuities capture only a portion -- sometimes a small portion -- of the gains of an index. Many sellers, who typically earn commissions from 5 percent to 9 percent or higher, gloss over this point. Other drawbacks include lengthy surrender charges, some 15 years or longer, and the complexity of the formulas to credit returns.
"The return formula is the real trick," Carlson said, with more than 30 in existence.
Formulas usually contain an annual "cap" no matter how high the index rises, and/or a "participation rate," or maximum percentage of the index gain to be credited, and/or a "spread" subtracted from the index's return.
Then there are several ways to calculate the return of the index, including "point-to-point' and "averaging" methods that can result in widely different numbers. The annuity comparison and shopping site, http://www.annuityfyi.com/criteria-equity-indexed-annuities.html, offers excellent consumer tips in evaluating index annuities.
Annuity sellers like to cite a paper from the Wharton Financial Institutions Center, an independently managed site at the
Half the time, though, annuity returns averaged 4.69 percent or less. Results were limited to 136 contracts from 15 companies that chose which products to submit, the paper said. The person listed first among three authors (not in alphabetical order) is
Roth and Swedroe said investors can build the equivalent of an index annuity by putting enough of their money in a certificate of deposit that will grow to the total principal amount at maturity, and the rest in a low-cost stock index fund. Even if the fund goes to zero, they'll get their original principal back. Any long-term stock gains will be taxed at a lower rate than the annuity interest, and they will earn stock dividends, which are typically excluded from annuity return formulas.
Available at Amazon.com:
- 6 Investing Mistakes Young People Make
- Inflation or Deflation: What's It Going to Be?
- How to Inflation-Proof Your Portfolio
- Easy ETF Portfolios for Any Age
- Gold's Hype May Blind Average Investors To Its Inherent Risk
- New ETF Holds Gold As Well As Silver, Platinum and Palladium
- To Be Truly Diversified, Do Investors Need Alternative Funds?
- The Best Short-Term Bond Funds for the Long Term
- How to Pick the Best Mutual Fund
- Why the Dow Usually Rallies After Midterm Elections
- Is a Retirement Income Fund Right for You?
- Index Annuities: Trick or Treat?
- Volatile Markets Beckon Beginning Investors
- Coca-Cola's Prospects Bubbling
- Balanced Mutual Funds Provide Defense
- International Growth Critical for Wal-Mart
- Global Financial Services Stocks Revive
- Cisco Systems Charging Hard Against Competitors
- Large Cap Stocks Move Up in 2010
- Betterment.com Brings Index Funds to the Masses
- Best Emerging Markets Funds for the Long Term
- 6 Reasons to Buy Dividend-Paying Stocks
- Why You Should Invest in Corporate Debt
- Risk Aversion Is Here to Stay
- Investors Lost Big Last Decade
- 3 Ways to Invest in the Financial Sector
- The Case for Investing in Commodities
- European Stocks as Contrarian Investment
- SIPC Considers Revamping Rules
- Will the Dramatic Run-Up in Real Estate Funds Last?
- 3 Ways to Use Index Funds
- How to Play It Safe With Muni Bonds
- Investing Strategies for This (Or Any) Market
- Mutual Funds for Dividend Junkies
- How to Navigate a Low-Rate Environment
- 5 Slow and Steady Funds for Skittish Investors
- Will the REITs Rally Continue?
- 3 Ways to Invest in the Real Estate Rally
- More You Know About Stocks & Industries; Less Volatility Will Rock Your World
- Investors Still Favor Bond Funds
- Valley Forge Fund: How a One-Man Mutual Fund Beats the Rest
- Mutual Fund Fee Reform: Multibillion-Dollar Sleight of Hand
- Avoiding a Bond Market Bubble
- Essential Sites For the ETF Novice
- When Choosing a Bond Fund Keep These Factors in Mind
- 3 Ways to Invest in the Small-Cap Rally
- Catastrophes and Your Investment Risk
- Mutual Fund Buzz: America the Beautiful
- Mutual Fund Buzz: Emerging Markets Get a Boost
- Is Your Portfolio Ready for A Double-Dip Recession?
- Anatomy of a Risky Target-Date Fund
- When is the Best Time to Buy An Immediate Annuity
- 5 Tips For the Average Investor
- Why Emerging Markets Belong in Your Portfolio
- What China's Currency Reform Means For Investors
- Financial Reform For the Retail Investor
- Target-Date Funds Are Not A 'Sure Bet'
- ETFs Can Be Volatile Too
- Chinese Growth Expected to Boost Asian Markets Long-Term
- 3 Mutual Funds to Steer Clear Of
- Mutual Fund Buzz: Alternatives On The Rise?
- Mutual Fund Buzz: The Tax Man Eyes The Fund Manager
- Mutual Fund Buzz: Bond Bubble?
- Ease Back Into Stocks With These Mutual Funds
- Value and Growth: Why Investors Need Both
- Investing Your Social Security Check? Consider These Factors
- New Efficiencies Should Help Alcoa as Recession Lifts
- Mutual Fund Fees: How Much is Too Much to Pay
- In Gold's Shadow: How Other Metals Fit Into Portfolios
- Should Investors Sit This One Out?
- There's No 'Perfect Time' to Dive Into Investing
- How to Keep Your Cool in a Turbulent Market
- How to Repair Your Damaged Portfolio
- Keep Bond Portfolio Broadly Diversified
- Why Not All Target-Date Funds Are Created Equal
- Five Tips to Avoid Confirmation Bias
- Financial Reform Legislation Gives Shareholders More Say
- Fiduciary Provision May Be Most Important Part of Financial Reform Bill
- What Gold Can and Cannot Do For You
- Why Your Portfolio Needs More Risk
- Read Mutual Fund Ads Critically
- Keep the Right Bonds in Your Portfolio
- European Debt Crisis Affects Investments
- 7 Valuable Lessons For Investors
- The Reality of Mutual Fund Returns
- Mutual Funds and a Changing Landscape
- Assembling a Sturdy Retirement Portfolio
- Funds for Recent College Grads
- Many 'Wide Moat' Companies Losing Competitive Advantage
- Who Got Hit Worst in the Market Crash
- Utility Stocks: Trade Flash for Dependable Payouts
- Formulate Strategy Before Diving Into Higher Risk Mutual Funds
- Contrarian Investors Target Promising Out-of-Favor Stocks
- Income Investors Face Challenges as Economy Shifts
- Can SEC Beat Goldman Sachs?
- Business Schools' Great Ethics Debate
- Investing for Retirement A Balancing Act
- Fees Can Take Big Bite Out of Retirement Fund Contributions
- Small-Cap Stocks Poised For Big Comeback
- John C. Bogle's Old-fashioned Investing Advice Still Applies
- 10 Great Mutual Funds You've Never Heard of
- Mutual Funds Fees & Expenses Only One Factor
- Why Investors Are Flocking to Index Funds
- Trend Setting Companies Target Hip Young Consumers
- Weakening European Stocks Offer Some Bargains for U.S. Investors
- Investing: What to Do About Inflation and What Not to Do
- Kick-Start a Portfolio With Just a Little Cash
- Exchange Traded Funds Offer Low-Cost Diversification
- Fresh Look at Socially Responsible Mutual Funds
- Technology Opens Doors for Investors
- Make the Most of Your Mutual Fund Money
- Fiduciary Standard for Giving Investment Advice
- 'Investment Rewards' Credit Cards Well Worth A Look
Investing - Index Annuities: Trick or Treat? | Successful Investing
(c) 2010 Humberto Cruz