Index Annuities

Question 1

Index Annuity

(Your client purchased an index annuity from you last year with an investment of $100,000. The particular index tied to this product had an annual return of -4%. If the participation rate is 90% with a cap of 5% and no annual minimum guarantee, the value of the account would be)

Answer 1

$100,000

(Please note that the return is negative (-4%). An index annuity does not participate in losses of the index, only gains. With no gain, and no guaranteed annual minimum, the account value remains at $100,000.)

Question 2

The percentage of the index’s return the insurance company credits to the annuity is determined by

Answer 2

The Participation Rate

(Virtually all index annuities have a specified participation rate, the percentage of the index’s earnings that will be credited to the account. For example, if the index returned 8% and the participation rate is 80%, the customer’s account will be credited with 6.4%. Not all index annuities have a cap rate, but even then, the cap rate only takes effect when the credited earnings exceed the cap. For example, if the cap in our example was 5%, that is what the customer would receive. It is important to read the questions carefully. The cap rate puts an upper limit on the amount credited, but it is the participation rate that specifies the percentage of the return that will be credited.)

Question 3

EIAs

(Equity Index Annuities)

Answer 3

EIAs almost ALWAYS come with a cap rate, a ceiling beyond which earnings cannot be credited to the investor’s account.

Question 4

How much can be earned with a variable annuity?

Answer 4

There is, theoretically, no limit as to how much one could earn with a variable annuity.

Question 5

EIAs & Variable Annuities are issued by?

Answer 5

Both are issued by Life insurance companies, and only the EIA (equity index annuities) offers a guaranteed floor (minimum return).

Question 6

Are EIAs securities?

(Equity Index Annuities)

Answer 6

Based on court rulings in effect at this time, the equity index annuity is not considered a security.

Question 7

An owner of an Equity Index Annuity would be wise to use the high-water crediting method if the underlying index was expected to:

Answer 7

Be volatile

(An advantage of the high-water crediting method is that the interest is calculated using the highest value of the index during the term. Therefore, in a volatile market, where prices are going up and down, it picks up the highest price.)

Question 8

If an index annuity has a participation rate of 80%, it means:

Answer 8

The investor’s account will be credited with 80% of the growth of the index.

(The participation rate of an index annuity is the percentage of the growth of the index credited to the investor’s account. For example, if the index had a return of 10% and the participation rate is 80%, the investor’s account is credited with 8% growth. This may be limited by a cap (a maximum), but unless a cap rate is stated in the question, there isn’t one. One of the benefits of an index annuity is that it only shares in the growth, NEVER any losses.)

Question 9

Index Annuities - Point to Point

Answer 9

Point to point offers the best return when the market has had a single drastic decline during the period.

(Using the annual high-water mark with look back will generally result in the highest return during periods of high volatility. The reason is because under this method, the highest anniversary value is used to determine the gain. In a volatile market, there is likely to be a high spike sometime during the period and that is the value used. The problem with point to point when there is a single drastic decline during the period is that the decline might occur at or just prior to the annual crediting computation. Annual reset does ignore the daily market fluctuations, but if the index is lower at the end of the year, there is nothing credited. In reality, annual reset has a lower participation rate than point to point.)