The Appeal of Indexed Annuities

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 59?, 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



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