{"id":75195,"date":"2023-10-03T00:47:56","date_gmt":"2023-10-03T00:47:56","guid":{"rendered":"https:\/\/todaysveterinarybusiness.com\/?p=75195"},"modified":"2023-10-03T00:47:56","modified_gmt":"2023-10-03T00:47:56","slug":"annuities-financial-wellness-1023","status":"publish","type":"post","link":"https:\/\/navc.sitepreview.app\/todaysveterinarybusiness.com\/annuities-financial-wellness-1023\/","title":{"rendered":"Low Risk, High Return? Wrong!"},"content":{"rendered":"

Many sellers of indexed annuities use the same approach with clients: the allure of stock market returns without the possibility of a loss in value. On the surface, the pitch is appealing, but is it too good to be true? Think about the message. Market returns without the risk of loss. What\u2019s the catch?<\/p>\n

Defining the Terms<\/strong><\/h3>\n

Indexed annuities also are known as fixed-index annuities, equity-indexed annuities and registered index-linked annuities. All are insurance contracts that credit a modest, guaranteed interest rate over a fixed number of years. Indexed annuities differ sharply from index mutual funds and are heavily marketed, especially to the 55- to 65-year-old bracket.<\/p>\n

An indexed annuity account may receive an interest credit based on the percentage of change in the value of a broad market index, typically the Standard and Poor\u2019s 500. The additional interest, if any, is calculated using a formula that determines how much of the change in the index is captured by the policyholder. Insurers typically use cap rates and participation rates to limit the amount of credited interest.<\/p>\n

A cap rate is the most you could be credited, depending on the index and selected time frame. So, a cap rate of 7% doesn\u2019t sound bad, especially since you have protection from loss, but the participation rate can erode the credit.<\/p>\n

The participation rate is the amount of return one can participate in. For example, a rate of 50% limits the index return by half. So, suppose an indexed annuity has a cap rate of 7% and a participation rate of 50% of the change in the value of the S&P 500, and the index returns 10% in a policy year. The participation rate applies in that case, and 5% is credited to the account.<\/p>\n

Worse, dividends are usually excluded from the index\u2019s total return for purposes of the formula. For example, if the S&P 500 returned 10% but 2% of those returns are from dividends, many annuities would consider 8% to be the index\u2019s return when calculating additional interest for your indexed annuity. In this instance, the credited amount would be 4%, given a 50% participation rate.<\/p>\n

Remember that annuities are insurance products, not securities. The U.S. Securities and Exchange Commission does not regulate annuities.<\/p>\n

Reasons to Be Wary<\/strong><\/h3>\n

We dislike indexed annuities and seldom see how they fit into a well-designed financial life plan<\/a>. Let\u2019s count the ways.<\/p>\n

1. Actuaries design insurance products to provide hefty commissions to the salesperson and handsome profits to the insurance company.<\/p>\n

2. You don\u2019t own securities but rather an insurance company\u2019s promise to pay. The SEC\u2019s Investor Bulletin<\/em> states, \u201cRemember that all amounts payable are subject to the ability of the insurance company to pay. If the insurance company experiences financial distress, it may not be able to fully meet its obligations to you.\u201d (You regularly follow the insurance company\u2019s Comdex rating, right?)<\/p>\n

Compared to buyers of index mutual funds, \u201cBuyers of indexed annuities concede several benefits that are routinely enjoyed by fund shareholders,\u201d says Morningstar\u2019s John Rekenthaler. \u201cBesides the ability to conduct meaningful investment research, they forgo liquidity, transparency and custodial protection. Indexed annuities divulge neither their investment tactics nor their expense ratios, and their scheduled payments consist solely of promises.\u201d<\/p>\n

In stark contrast, mutual and exchange-traded funds possess assets held in custody by a third party. If a mutual fund company goes bankrupt, the fund is unaffected. Shareholders still own the same fractional interest in those underlying assets held in custody.<\/p>\n

3. Watch for surrender charges. If you exit the contract early, you\u2019ll pay one. Whenever possible, avoid financial decisions that limit your future flexibility and tie your hands. Also, many annuity contracts allow the insurance company to change how gains are credited. That\u2019s often undisclosed.<\/p>\n

4. You\u2019ll never enjoy market returns because indexed annuities aren\u2019t designed to do that.<\/p>\n

5. The salesperson is not a fiduciary, your interests are not primary, and sales commissions<\/a> on many indexed annuities can be excessive. Given human nature, do you think insurance agents push low-commission products? Are they inclined to act in your best interest to the detriment of their commissions?<\/p>\n

6. Transparency and comparability are lacking. According to Rekenthaler, \u201cMost indexed annuities are unaccompanied by a prospectus. Ultimately, the investment must be made on faith.\u201d<\/p>\n

7. Beware the opportunity cost. Money invested in an indexed annuity is tied up for years. Exceptions are limited.<\/p>\n

8. Beware of taxable withdrawals. Sellers tout annuities as a great way to defer income taxes as the account grows. While that is true, what is typically undisclosed is the disadvantageous treatment that annuities get when you make a withdrawal. For example:<\/p>\n