Friday, April 29, 2005

Equity Index Annuities Con'td

This is a continutation of commenting on the article from 4/25/05. All credits to the article are given there. The actual article is in black and my comments are in red.

What is an Annuity?

An annuity is a contract between you and an insurance company in which the company promises to make periodic payments to you, starting immediately or at some future time. If the payments are delayed to the future, you have a deferred annuity. If the payments start immediately, you have an immediate annuity. You buy the annuity either with a single payment or a series of payments called premiums.

Annuities come in two types: fixed and variable. With a fixed annuity, the insurance company guarantees both the rate of return and the payout. As its name implies, a variable annuity's rate of return is not stable, but varies with the stock, bond, and money market funds that you choose as investment options. There is no guarantee that you will earn any return on your investment and there is a risk that you will lose money. Unlike fixed contracts, variable annuities are securities registered with the Securities and Exchange Commission (SEC). To learn more about variable annuities, read our Investor Alert, Should You Exchange Your Variable Annuity?

What is an Equity-Indexed Annuity?

EIAs have characteristics of both fixed and variable annuities. Their return varies more than a fixed annuity, but not as much as a variable annuity
[This is NOT TRUE---An Equity Indexed Annuity is a FIXED annuity and You can NOT LOSE MONEY IN IT as long as you hold it until maturity. In fact, like every other fixed annuity, an equity indexed annuity has a minimum guarantee and you are guaranteed to make some money if you hold it until the maturity date EVEN IF THE MARKET DECLINES CONTINUOUSLY]. So EIAs give you more risk (but more potential return) than a fixed annuity but less risk (and less potential return) than a variable annuity. [Again, this is false. Since an Equity Index Annuity is Fixed, It has the SAME risk as any other fixed annuity and you can't lose money like you can in a variable annuity. Unlike traditional fixed annuities, however, there is potential to make more money without taking any market risk by using the indexing options.]

EIAs offer a minimum guaranteed interest rate combined with an interest rate linked to a market index. Because of the guaranteed interest rate, EIAs have less market risk than variable annuities. EIAs also have the potential to earn returns better than traditional fixed annuities when the stock market is rising.

Caution! Unlike variable annuities, EIAs are typically structured so that they are not securities registered with the SEC. Nor are the sales of EIAs regulated by the SEC and NASD. This means that non-registered EIAs are not subject to the customer suitability, disclosure, and sales practice requirements that registered securities are. [VERY GREAT POINT. There are much less regulation on these vehicles. This is a cause for concern. Let me point out that the real risk is there is much less regulation on the agents who sell them. Agents do not have to be securities licensed to sell these. So therefore, a regular old life insurance agent can sell these products. This can be a problem. However, these are still annuities, which means that they are insurance products. Therefore, they fall under regulations of the insurance industry. The insurance industry is a highly regulated industry and that is at least some consolation.]

Ignorance is NOT Bliss.

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