Question #1: What is the participation rate?
Most fixed-indexed annuities limit interest crediting with the participation rate. For instance, the insurance company may declare a participation rate of 90% which means the annuity would be credited with only 90% of the interest experienced by the index for that year. In other words, if the index increased 10%, then the increase in your annuity would be 9%.
Question #2: What’s the cap, how often can it be changed, and how low can it go?
The cap rate is the annual maximum percentage increase allowed. For example, if the chosen market index increases 15%, and the contract has a 14% cap, the increase will be limited to 14%. Most fixed-indexed annuity contracts by design reset the cap monthly, annually, or at renewal. Before investing, find out not only what the current cap is, but what is the lowest cap the insurance company can set and how often can it be adjusted.
Question #3: Does the calculation of market index return include dividends?
Most fixed-indexed annuity increases are tied to index increases deriving from market price changes only, and exclude any increase due to the payment of dividends. For example, in 1998 the total return (i.e., capital gains and dividends) for the S&P 500® Index as reported by Ibbotson Associates was 28.6%, while that for just capital gains (i.e., market price) was 26.7%. A fixed-indexed annuity tied to the S&P 500® Index would typically use the smaller (26.7%) return. Couple that with an example participation rate of 90%, and the increase in the indexed annuity becomes just 24%, some 4.6% below the total increase of the market index. And remember, historically dividends have made up 40% of the total S&P 500 ® return!
Question #4: How would your money have performed in an annuity over the last decade, versus investing directly in an index?
For example, choose any time period and ask your financial advisor to calculate for you how you would have fared in the S&P 500® directly versus a typical fixed-indexed annuity. While investing directly in the index would not protect your principal or offer a guaranteed minimum return, the comparison will give you a frame of reference to compare the risk versus return of the two products. If he or she cannot do this, call Annuity FYI – we’ll do it for you!
Question #5: What is the index on which increases are based?
Be sure to ask for the historical performance of the index — if your financial advisor doesn’t know it, call Annuity FYI ? we’ll tell you.
Question #6: What is the surrender period of the annuity?
As with any annuity, make sure that the surrender periods are consistent with you retirement timelines. What’s a surrender period?
Question #7: Does the financial advisor or insurance agent selling you the fixed-indexed annuity have your best interests in mind?
Some financial advisors will try to sell you a fixed-indexed annuity not because it is in your best interest, but because the advisor does not have a license to sell registered products (such as variable annuities). Likewise, some financial advisors may try to sell you a fixed-indexed annuity that pays the advisor a high commission, regardless of whether it is in your best interest. If you are unsure if you are being offered the most competitive product for your needs, call or email Annuity FYI
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