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Annuities
The Appeal of Indexed Annuities
By Richard Dragotta
Managing Partner, Integra Investment Service, LLC
The upside potential and downside protection of indexed annuities
continue to appeal to investors, and in 2004 fueled sales that topped
$23.4 billion _ a 67 percent increase over 20031
Why the recent rush to indexed annuities? It may be a combination of
factors. Investors who are concerned about volatility in the stock market
may find the guarantees of indexed annuities appealing. And the ability to
participate in market gains may be attractive to investors looking for
potential growth.
Best of Both Worlds?
An indexed annuity is a fixed annuity that offers returns tied to the performance of a market index,
such as the S&P 500. It gives investors similar benefits to buying stocks but offers some downside
protection. When the market rises, annuity contract holders can participate in the gains of the index.
In a down market, holders are guaranteed a minimum return.
Indexed annuities are not
appropriate for every investor.
Participation rates are set and
limited by the insurance
company. So an 80 percent
participation rate means that
only 80 percent of the gain
experienced by the index for
that year would be credited to
the contract holder. Also, like
most annuity contracts, indexed
annuities have certain rules,
restrictions, and expenses.
Some insurance companies
reserve the right to change
participation rates, cap rates, or
other fees either annually or at
the start of each contract term.
These types of changes could
affect the investment return.
Based on the guarantees of the
issuing company, it may be
possible to lose money in this
type of investment. It is prudent
to review how the contract
handles these issues before
deciding whether to invest.
Most annuities have surrender
charges that are assessed
during the early years of the
contract if the contract owner
surrenders the annuity. In
addition, if the contract is
surrendered before age 59½, it
may be subject to a 10 percent
federal income tax penalty.
Investors seeking less risk and volatility in their portfolios may find the protection of principal and
upside potential of indexed annuities to be attractive. Call if you would like to discuss strategies that
can help add security and growth to your portfolio.
1 The National Underwriter Company, 2005
Fee based Asset Management and Securities offered through Linsco Private Ledger. Member NASD/SIPC.
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