Fixed Index Annuities

Boca Raton, Florida Insurance Fraud Attorney, Russell L. Forkey, Esq.

While a fixed index annuity is a form of "investment", it is in reality an insurance product. What this means for an investor is that the person that sells the product to you does not necessarily need to be licensed with the Financial Industry Regulatory Authority, Inc. (FINRA). However, the agent does need to be licensed in your state to sell insurance products. Consequently, you may not have the protections afforded by the FINRA rules and regulations. Regardless, there are still standards which agents must comply with in selling theses products. Therefore, if you feel that you have an issue relative to the insurance product that has been sold to you, you should consult with experienced counsel.

Fixed Index Annuity:

 A fixed index annuity is an annuity contract, issued by an insurance company, that guarantees that as long as you own the contract and comply with its terms, you cannot lose money. When the stock market goes down, you lose nothing. When the stock market goes up, you earn a percentage of the gains. This sounds good. However, fixed index annuities are complex investments (insurance contracts) and not for the faint of heart. In cases that we have handled over the years relating to these types of investments, it has been clear that the client never understands all of the terms of the contract and that usually the agents that sell them don't truly understand how they work.

As we repeatedly have indicated, it is important for you to read the contract and make sure that you understand all of the terms and concepts contained in the contract (or initially the prospectus). If you don't do this, you really don't have any chance of truly knowing what you are getting yourself into.

For example, here are a few words and phrases that are critically important to gaining even a minimal understanding of how a fixed index annuity works. Let's say that you agent offers to sell you a fixed index annuity with an annual reset, a 50 to 60 percent participation rate, a eight year surrender period and a guaranteed minimum interest rate of 3 percent.

  • Annual reset - Every year on the date that you purchased your fixed index annuity, the insurance company measures how far the index being used by your policy rose of fell during the last 365 days. If you invested $10,000 and the index went up 10 percent then your account value would be $11,000. This sum would be locked in and if you did not withdraw any money, your account would never fall below $11,000. If the index being used stayed flat or went down, you would not earn anything other than a percentage of your premium or initial contribution as set forth in your policy.
  • Participation rate - This is your share of the rise of the index. The particular percentage that you would be allowed to participate in the increase in the index would be set forth in your contract.
  • Guaranteed minimum interest rate - This number provides you with the absolute minimum amount that you policy will be worth at the end of the surrender period.
  • Surrender period - If you have a surrender period of eight years and you withdraw more than 10 percent of your money in any given year during that time, you will pay a surrender charge on the excess amount withdrawn - not on the entire withdrawal. The charge will be 8 percent the first year and usually decline by one percent per year. This charge will be waived if you die or go into a nursing home.

Finally, there are two main types of index annuities, which differ in the time period over which they measures changes in the market index used in the contract. These are the annual reset and the point-to-point contract. Within each of these types variations abound. Insurance companies use many different methods to calculate the percentage change in the index they credit to you account. These calculations are know as adjustments. Adjustment methods vary widely and have a material impact on your rate of return.

Annual reset - There are many annual reset annuities, which differ according to their method of calculating your share of the change in the index. Different elements of these methods may be combined with each other to produce an almost infinite variety of hybridized index annuities with deepening levels of complexity. Here are a few examples:

  • Annual reset with averaging.
  • Annual reset with monthly point to point.
  • Annual reset with cap.
  • Annual reset with a participation rate.
  • Annual reset with a yield spread, margin, or asset fee.

Point-to-point - In a point-to-point index annuity, the insurance company waits until the end of the entire surrender period, as opposed to the end of every year, to measure the progress of the index. The company then credits the percentage gain or loss in the index and credits you with a percentage of the gain, if any as occurred.

Because most people would not purchase an index annuity that had such a feature, many point-to-point contracts include provision that protects investors against a catastrophic decline in the market index during the final years of the contract. If the point-to-point contract that you are considering contains such protections make sure that you understand how they work and are going to be satisfied with the potential results.

As a result of this brief discussion, it should be abundantly clear that these are complex investments and before considering investing in one, you need to consult with someone that is schooled in these types of investments.

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