Savings Account & MMA Rates
CD (Certificate of Deposit) RatesThe last several years have seen an explosion in the equity-indexed annuity arena, with a growing number of companies offering more and more products in this category. But while these hybrid annuities can provide many benefits to investors for whom they are suitable, they can also pose some risks to those that do not understand them.
By definition, an equity-indexed annuity is currently considered a cross between a fixed annuity and a variable contract. These vehicles allow investors to participate in a set percentage of the gains of the stock market without any downside risk. A minimum guaranteed rate is usually also included.
Of course, there are a great many competent, legitimate agents and advisors who work with equity indexed annuities and match them appropriately with their clients’ needs. Unfortunately, there has also been a growing trend among some insurance agents and brokers to aggressively market these contracts to senior citizens as the only viable investment alternative available to them in these uncertain times. There are also numerous crediting methods used by many different insurers to determine the return on capital for the investor. While this type of annuity can offer higher returns than traditional fixed annuities, it also often contains a number of provisions that investors can find very confusing. For example, many equity-indexed contracts have very long surrender periods, such as 12 or even 15 years. While many of these products contain an initial free-look period that may last up to two years, they can become substantially illiquid once this period has expired. Contractholders that need to liquidate their investment after the free-look period and before the end of the contract term can face early withdrawal penalties of up to a whopping 35%, plus forfeiture of all gains within the contract. However, many companies will now allow investors to withdraw up to 10 or 15% of their contract value each year without penalty.
Prospective investors should carefully consider both the benefits and drawbacks of these complex instruments. While indexed annuities can be an excellent vehicle for some investors, those who may need greater liquidity may want to consider other alternatives.
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