Contract Provisions Common To Fixed-Indexed Annuities
Here is a description of Fixed-Indexed Annuity (FIA) owners:
- People who already own a variable annuity and who want to “lock in” stock market gains and still participate in index growth to some extent.
- People who already own a fixed annuity and are disappointed with current renewal rates.
- People who almost bought an equity mutual fund but didn’t because of the risk.
- People who almost bought a variable annuity but didn’t because of the risk.
- People who almost bought a fixed annuity but didn’t because of the return.
Since FIA contracts do differ with a wide variety of moving parts and there are as many as 40 different ways that earnings can be credited, it is again so important for the advisor to make informed recommendations so that the consumer makes an informed decision.
The Index and Indices
Simply put, a Fixed-Indexed Annuity can shift the responsibility to declaring renewal rates away from the insurer’s Board of Directors to some external force like an index. Indexed Annuities actually began in the early 1980’s when one insurer decided to pay interest rates at renewal based upon an index called the Solomon Brothers Bond Utility Index. Other insurers surfaced and they followed different indices.
Fortunately, advisors have realized the importance of interest rates after the first year. What is going to accumulate the most amount of money ... the first year initial interest rate or the interest rates declared in years 2 and thereafter? Not only were the specific renewal rates a concern by some parties, but also the method in which some insurers used in determining renewal rates confused others.
Many of the insurers who have introduced Fixed-Indexed Annuities have chosen the Standard & Poor’s 500® Index, The Dow Jones Industrial Average®, Russell 2000, NASDAQ, etc. as their index or indices.
The Standard & Poor’s 500®Index
Standard & Poor’s 500® Index Composite Stock Price Index is a market-value weighted index of 500 stocks that are traded on every major US stock exchange, NYSE, AMEX and NASDAQ.
The 500 companies listed are not necessarily the 500 largest but they tend to be the leading companies in the leading industries. As a result, this index is highly regarded, often quoted, and often used as a benchmark for economic growth. Although not every company represented in the Standard & Poor’s 500® Index is a household name, many companies are. The Standard & Poor’s 500® index is widely published in most daily metropolitan newspapers and in The Wall Street Journal, USA Today, and New York Times.
The Dow Jones
In the opinion of W.V.H., Inc. and others, The Dow Jones will be chosen more frequently among many advisors and consumers. Since we do not have a crystal ball to which index is superior, doesn’t it make sense for retirement dollars to follow each index instead of one? (S&P)
The Dow Jones Industrial Average® is an unmanaged index that consists of a price-weighted list of 30 highly-traded Blue Chip companies on the New York Stock Exchange. Companies like IBM, Exxon, General Motors, Wal-Mart, and Microsoft are part of The Dow Jones Industrial Average®.
Term of the Contract
The term of the contract is the length of the surrender charge period (1 to 15 yrs) before an insurance company penalty-free total surrender can occur.
