For a fixed, indexed deferred annuity the amount that is added to your initial balance is not a fixed interest rate but a calculated rate (but some minimum rate is also usually set).
If you do not understand the contract calculations, then do not buy. You must understand what you are buying at all times since alternatives always exist to these products.
That calculation in the contract is (1) complex and (2) possibly changing from year-to-year so go slow, read and have a professional, independent planner review it first. The parts to the calculation are:
(1) The index used = usually the S&P 500 (large-company; U.S. stocks)
(2) The participation rate = some percentage of the movement of the index up to a maximum cap. (You never get all the gains and none of the losses - dream on).
This never includes dividends (because as I mentioned in a previous post, the investment is in stock options not the actually stocks and so dividends are not included); 100% up to some percentage cap sounds nice, but 50% of a higher number may be even better. Sometimes it is stated as a margin (or spread) below the index.
(3) Annual reset = the gain or loss in the index measured is calculated based on a certain time period.
This time period is important. Some contracts average the returns over a calendar year or anniversary of the date you started the annuity; some look at monthly returns, some are "point-to-point". Depending on how this "annual reset" is calculated could mean protection from losses one month before your anniversary date or no protection.
(4) High water mark = protects gains in our accumulated balance by setting your balance at the highest balance that occurs during a particular period.
(5) Required annuitization = if the contract allows you to accumulate assets within the annuity but the only way to get the money out is to "annuitize" (take a monthly payment), then you must understand how that works.
If the monthly payout is the only way out of the contract, then your overall rate of return must include this payout period and your life expectancy. After looking at a 5-10 year accumulation period and then a monthly check for the rest of your life, the rate of return may be very disappointing.
The complexity of these fixed indexed, deferred annuities suggests using an independent professional to run the numbers before accepting the salesman's theories. Many of them do not understand the products they sell.
My advice: buy if you understand them and they fit into a strategy, but never let anyone "sell" you one.
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.