Are Equity-Indexed Annuities Riskier?
An equity-indexed annuity is a form of deferred annuity which offers a minimum interest rate while protecting against loss of principal. Furthermore, market index returns may also be possible; however, financial strength of insurance company must always be a consideration when considering such products.
Indexed annuities may impose caps and participation rates that restrict how much of an index’s gain you can access, including dividends. These restrictions could prevent investors from accessing all or some of its gains.
They are riskier than traditional fixed-deferred annuities
Equity index annuities offer the benefits of both fixed-deferred annuities and the Standard & Poor’s 500 stock index performance in one unique savings product, providing an attractive savings option for people comfortable with occasional fluctuations and looking to build tax-deferred interest over time.
Before purchasing an EIA, there are a few key aspects that must be kept in mind. First and foremost is how the insurer sets parameters that determine how your money will grow over the accumulation period and provides protection features against losses to protect principal.
Factors can influence the amount of interest credited to your account each year, such as indexing method and participation rate. Furthermore, most contracts come equipped with a rate cap that limits how much index gains will be credited back into your account; the cap’s size can differ based on an annuity company’s projection for future returns.
They are riskier than indexed annuities
Contrary to traditional fixed annuities, equity-indexed annuities offer investors a minimum guaranteed rate that may help protect against the risk of money loss while earning interest tax-deferred. Unfortunately, however, they may incur high fees and penalties upon early withdrawals.
EIAs often come equipped with participation rates and rate caps that limit how much an investor can make each year. For instance, an 80% participation rate means that if an index it tracks gains 15%, only 12% will come through to your account.
Additionally, EIAs often impose spreads and fees that reduce returns, such as mortality and expense risk charges and administrative fees used to pay insurance agency commissions. These costs could range from 1.25-1.5% of your premium payment; they don’t appear anywhere on their statement of returns; investors will have no idea.
They are riskier than variable annuities
Although indexed annuities offer you an affordable way to follow the market, they come with caps which limit potential gains and may incur surrender fees or commissions which reduce earnings.
Equity-indexed annuities (EIAs) provide returns that combine guaranteed minimum interest with an index-linked interest rate that follows market index performance. This rate may be subject to caps; participation rates of each EIA determine how much of its gains you may reap as part of its returns.
An annuity is typically sold by producers who receive high commissions for each sale. Such commissions encourage aggressive selling tactics which expose these complex financial products to misrepresentations and material omissions, are illiquid and may impose steep surrender charges that remain in effect over a long period. As a result, it is vital for producers to carefully consider suitability before recommending these products to clients.
They are riskier than fixed annuities
Equity-indexed annuities present several serious drawbacks. Some products feature caps which restrict how much interest can be earned if market index performance improves; other offerings may come with hidden fees that reduce potential returns and could reduce or alter how much you receive post accumulation period.
Before purchasing an annuity, it is vital that all potential purchasers understand its features. Annuities can be complex investments which may contain misrepresentations and omissions as well as significant surrender charges over time; as a result, these products should only ever be used as replacement products if necessary and their misuse could put consumers in financial jeopardy. That is why the Bureau is intensifying enforcement against those attempting to sell them blindly to unaware investors.
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