Equity-indexed annuities are complex financial instruments in which an insurance
company guarantees a minimum interest rate and some protection from loss of principal,
and provides an opportunity to earn additional interest based on the performance of a
securities market index.
While equity-indexed annuities appear to offer full protection in the gains of a
securities market index, oftentimes the insurance company imposes limits on the actual
upside gain through a so-called "participation rate."
Many equity-indexed annuities also impose a so-called "cap rate" that represents
the maximum percentage increase allowed to investors.
Many equity-indexed annuity contracts permit the insurance company to change the participation
rate and cap rate on an annual basis.
In addition to the participation rate and cap rate, the interest rate of an equity-indexed
annuity can be lowered by a so-called "spread," an amount subtacted from index's gain.
While insurance companies often limit the positive increase in the rate of return for
an equity-indexed annuity, decreases in the rate of return are not limited.
Equity-indexed annuities do not typically provide for investor participation in the
dividends accumulated on the securities represented by the index.
Equity-indexed annuities do not provide the same returns as an index mutual fund.
Withdrawals from equity-indexed annuities are taxed as income, whereas gains from an
index fund are taxed at lower capital gains rates.
Many equity-indexed annuities carry lengthy surrender periods and exorbitant surrender
penalties.
Equity-indexed annuities are oftentimes high-fee, high-commission products.
The method with which an insurance company calculates the change in the relevant securities
index can have a dramatic impact on the rate of return, and in many cases results in an
interest rate not reflective of the actual change in the index.
Investors can lose money buying an equity-indexed annuity, especially if the contract
is cancelled within the surrender period.
Many equity-indexed annuities permit investors to realize the upside interest rate only
if the insurance policy is either annuitized or if the investor avoids making any withdrawals
for the entire surrender schedule. If an investor decides to take an early withdrawal or does
not annuitize, many equity-indexed annuity policies pay only the lower, guaranteed interest
rate, rather then the higher, indexed rate.
The above 14 points have been copied verbatim from
In the Matter of Investors Capital Corp., Massachusetts Securities Division Docket No. E-2005-0190 pertaining to broker-dealer supervision of sales of index annuities. This matter was settled before trial. Click to retrieve documents relevant to the case, including the complaint and settlement order.
The above information is neither investment advice nor purports to be a full and complete description of all such "equity-indexed" products or any specific product offered by any spcific insurance company(s). It consists of public information for the purpose of providing guidelines and of assisting prospective purchasers to look for specific conditions in evaluating such contracts.
