CHAPTER SEVEN -  EQUITY INDEX ANNUITIES

 

BACKGROUND

 

The Equity Index Annuity (EIA) is not only a new product; it is a somewhat complicated and unusual policy.  It is an insurance product that determines the annuity payments by the use of an index “geared” to the fluctuations of the stock market.  It is still considered as “insurance” and not as security, therefore an insurance-only agent can market the plan, and a securities license is not needed (although it is may be recommended as described later).  This explanation of the product is not only for informational purposes, but may help to keep the product out of the regulation of the Securities and Exchange Commission because of misuse or misrepresentation by insurance agents. 

 

 

This product offers a unique planning opportunity for financial planners.  However, there are many provisions and elements of this new product and many new options and changes are introduced with regularity.

 

Terminology is important with this product, as because it is a new product; it has introduced new words and new definitions of existing words into the vocabulary of the financial community.  As with many new products, it is extremely important that terminology be completely understood.

 

WHAT IS IT?

 

An Equity Index Annuity is, simply put a fixed deferred annuity.  It is not only a new type of annuity, it is not a security, it is not a Variable Annuity – it is a fixed deferred annuity with all of the guarantees and features. 

 

 

Traditionally on a fixed annuity, the interest rate credited to the annuity is based on existing and current interest rates which is guaranteed by the insurance company and is guaranteed payable for the term of the annuity.  Since most fixed annuities use a one-year period, they are renewed for another year, one year at a time.  While it may have a guaranteed interest rate of, typically, 3 percent, it will use current rates each year, but never less than the guaranteed rate. 

 

With an EIA, the interest rate is based on a formula linked to an independent stock market index – usually Standard & Poor’s Composite Stock Price Index (S&P 500).  So, to summarize: an Equity Index Annuity is a fixed deferred annuity that uses an external index that reflects the fluctuations of the stock market to determine the interest earned. 

 

The EIA is not a security, indexed mutual fund, nor an investment in the stock market, nor a Variable Annuity; it is also NOT a substitute for any of these investment vehicles. However:

 

 

(Blaring of trumpets, rolling of drums, resounding applause of thousands of investors….)

 

It is a fixed annuity.  A fixed annuity protects the annuitant from the risk of losing their invested money (principal) because of the vagaries of the stock market.  This is the safety factor that has made fixed annuities attractive throughout the years and which are then used for “safe” investments that will not be accessed for a period of years.  Remember also, as stressed throughout this text, risk and return work in tandem – as the risk increases, the return increases.  Therefore, the security of a fixed annuity would indicate that the return would be provided at a low rate of return. 

 

With an EIA, the investor is provided with an opportunity to share in increasing rates because of increasing values in the stock market, and still do so with a guarantee that the principal will not be touched.  It can be used to provide the annuitant with a steady stream of income, and can be used to supplement other income like Social Security, pension plans and income from savings.

 

HISTORY OF THE EIA

 

The EIA was introduced first in the late 1980’s but not marketed successfully.  Neither the product nor the company is still in existence.  In 1994 two companies reintroduced the Equity Index Annuity.  In 1996, $1.4 billion in premium was sold, in 1997, it went to $3.5 billion, and in 1998, it was $5 billion.  Today, there are more than 80 different products from more than 40 companies. 

 

As this product is dissected in this text, the question will usually arise as to why there are so many and varied forms of EIA’s.  There are a variety of reasons that are the result of experience of the market, the marketing effort, the customer’s viewpoint, and the home office concerns.

 

There are a variety of means used by insurance companies to measure the movement of the index used by the company, and each method is responsible for some form of variation.  Since the assets of the insurance company “guarantee” the returns, including the guarantee of the “minimum,” the portfolio containing the reserves for these products must mirror or closely imitate the index at any particular time.  As experience in persistency, for instance, becomes more valid, the length of time that the assets must be invested becomes more apparent.

 

This is a new product and any new product is the result of the “best guess” of the marketing staff, the investment and underwriting philosophy of the carrier, and the product creation by the actuaries based on their assumptions.  Rarely has any insurance product (or most any product) been so perfect when first introduced that no changes were necessary later.

 

Although rarely discussed publicly, there is continued concern by the insurance companies as to whether the product will be considered as a “security” by the SEC, which would require much additional administration, compensation methods, securities licensing of their sales people and the general headaches connected with dual regulation – the State Department of Insurance, and the Federal Government’s Securities and Exchange Commission.

 

Probably the most significant changes come as a result of input from the marketing area.  If the product does not sell, all of the expertise and expense available is of no consequence.  The customer tells the agent/financial planner as to what they want and what they need, plus any reason that they do NOT want to purchase the product. 

 

Then, of course, arguably as important as marketing input, is the actual fluctuation of the market.  As noted later in this text, the various types operate best when the market is performing in a particular manner.  When this product was first introduced the stock market and other investments were behaving much differently than they are today.  As to what appealed to a certain class of customer at that time is probably much different today.

 

Competition plays an important role in developing types of EIA’s, as it does in the development and revision of all products.  Since two companies introduced the plan in its present basic form, and that has expanded to around 40 companies now, it is self-evident that competition was involved.  It should be pointed out that any time an insurance company introduces a new product, it must go through a lengthy period of approval by various Departments of Insurance, and during this period of time it cannot make any changes of any type.  If it does make even minor changes in most cases, it will have to resubmit the plan for approval all over again, causing another delay.  In the meantime, another company can create a “better” plan and submit it to another Department.

 

WHY INDEXING?

 

Indexing is nearly as old as the stock market.  The government uses the Consumer Price Index (CPI) which is a method of measuring goods and services, which is used by the government and industries to measure inflation.

 

Some of the most brilliant of actions seem so elementary in retrospect that one must wonder why no one else had thought of it before.  In the mid 1970’s, a company that markets mutual funds, decided to “index” the mutual fund by buying the same stocks as the Standard & Poor’s 500.  Other mutual funds followed, as later did banks and financial institutions that offer financial products.  While actually the Standard & Poor’s 500 Index is an “index,” it is also an industry guideline that measures stock prices of 500 leaders in their particular industries.  Therefore, to “mirror” the index, invest in the same 500 companies. 

 

The Dow Jones Industrial Average is another “index” that tracks the activity of 30 “blue-chip” companies.  It is important to note that both Dow Jones and S&P 500 are “averaging” indexes, e.g. they use the average stock value for their index.  S&P’s 500 uses a “weighted” average which is believed to more accurately reflect the action of their stocks over a period of time.

 

Indexing is popular because, for instance, an investor in a mutual fund that tracks the S&P 500 can feel secure knowing that the “best” stocks in the market comprise the portfolio of which he is a part owner.  While most mutual funds are “managed,” there are those that are not managed because they so closely follow the S&P or DJ indexes.  Many pension fund managers use these indexed stocks as it automatically creates diversity in the market. 

 

One other factor, that is not of much importance at this time but could become more important in the future, is that historically the stock market has outperformed the inflation rate (as well as most other types of investments).  Therefore, an indexed product should provide a “hedge” against inflation.

 

THE TRUST FACTOR

 

One of the problems with fixed annuities is that the insurance company makes the investments that will determine the annuity’s return.  In effect, the insurer is telling its customer that he/she should “trust me to make the best investments on your behalf.”  Remember that deferred annuities are annual products, and the interest rate used during any one period is the result of the insurance company’s declaring what interest rate it will use.  Also, if the customer does not like the interest rate at the end of any year, there is a surrender charge that can be quite severe in the early years of the annuity.  Therefore, the annuitant cannot decide that they can make more money just by following the S&P or Dow Jones, cash out their annuity and invest it otherwise – without paying a large penalty. 

 

With an EIA, there is no “trust me” factor.  The annuity is indexed and moves according to the fluctuations of the market.  Some EIA’s have some restrictions by making their plans subject to changes in the participation rates or “caps” during the limited liquidity years.

 

Indexed annuities are different from indexed mutual funds in one primary and substantial reason.  With a mutual fund, if the index should take a dive, the monetary risk is with the holder of mutual fund shares.  With an indexed annuity, however, the insurance company is the one that is at risk, as the annuitant does not lose his/her principal.  This is guaranteed by the assets of the insurance company (and in most states, backed by guarantee funds also).

 

MARKETING THE EIA

 

In the early 1990’s, EIA’s were introduced to the securities market through national stock brokerage firms, independent broker-dealer firms and regional brokerage firms.  The national stock brokerage firms have not been very successful in marketing the EIA’s, as they have traditionally marketed investments with a risk factor and they have not actively marketed products with limited risk.  The sale of EIA’s by these firms is increasing but not significantly.  The independent broker-dealers have embraced this product however, as they usually take more of a professional financial planning approach with their customers and they recognized early how the EIA could be an integral part of their client’s portfolio.  They have produced a large portion of EIA sales.

 

This product was a natural to life insurance agents who are accustomed to selling fixed annuities and life insurance that provides for safety of principal and interest rate guarantees.  At last they can offer an Equity Index Annuity that is an insurance product and they do not have to go through the licensing routine of a securities dealer (although a recent survey indicated that nearly 80% of those agents who have sold EIA’s, are registered representatives).  They can now actually offer their customers an opportunity to participate in greater growth in their annuities without the risk of losing their principal.  Agents, as can be expected, are the largest marketers of the EIA product.

 

Banks have been interested in the EIA and bank sales have grown consistently.  Many feel that banks will become a major marketing source as bank customers are perceived as conservative in their investments, and are not comfortable with risk products.  With the guarantee of no market risk, they should be perfect for bank annuity customers.

 

SEC REGULATION/NON-REGULATION

 

Most of the EIA’s marketed today are not considered as security products and actually fit a heretofore vacant area between fixed annuities (insurance products) and Variable Annuities (security product).  The few EIA’s that are registered are structured differently than the annuity type of EIA.  The registered EIA must be sold with a prospectus and the agent must hold a NASD Series 6 or 7 license.  Some states may require that the agent also pass the Series 63 examination.

 

Without going into detail as to the appropriate government regulations that determine what is a security product as opposed to an insurance product, basically in order not to be classified as a security, it must meet the following conditions:

1.  The product must be issued by an insurance company.

2.  The insurer must assume the investment risk.  The contract’s value must not vary with investment experience, a minimum rate of interest is credited to the contract, and the current interest rate must be declared in advance and not modified more than once a year.

3.  It must not be marketed as a security or sold (primarily) as an investment.  There are substantial marketing requirements, such as it must be accurately described, both the investment and the insurance contract, and the long-term retirement or income security features of the contract must be emphasized.

 

It should be noted that under government regulations as summarized in (2) above, the EIA does definitely qualify as an insurance product because it declares the interest rate in advance. 

 

It would be fair to ask why some insurance companies have registered their EIA versions.  Probably, their sales force is mostly registered representatives who are used to selling Variable Annuities and other securities.  Also, a registered product allows the salespeople to emphasize the product’s investment aspects. 

 

It should be recognized that the S.E.C. could at any time decide that the product is a security and the agents must be registered representatives.  Even though the best legal minds in the business maintain that such a decision would be contrary to the law, it could be costly and useless to appeal any such decision.  Companies are still relying on the legal opinions of their attorneys and are treating the EIA as an insurance-only product.

 

PROVISIONS OF EQUITY INDEX ANNUITIES

 

 

The following discussion of provisions, features and uniqueness of the Equity Index Annuity does not cover all of the variations that are available on the market today.  This product, still in its infancy, has already undergone changes and will undoubtedly undergo more in the future.  Certain features are basic to all of the plans, and will be discussed in some detail.

 

The most significant and principal difference between the EIA and other annuity products is simply that the interest credited to these accounts is based on a market index.  The index used in most EIA products is based on the Standard & Poor’s 500 because:

 

1. The S&P 500 is widely quoted and understood.
2. It measures the changes in the prices of 500 stocks, which represent at least 70% of the equity market in the U.S., therefore it is an excellent indicator of the overall stock market movements.
3. The S&P 500 stocks are traded on the New York Stock Exchange, the American Stock Exchange and the National Association of Securities Dealers Automated Quotation System.  They represent different economic sectors, divided into various industry groups and are linked to excess of $600 billion in public and institutional funds.
4. The S&P 500 is a “market-value” index, i.e. each company’s value is determined by multiplying the number of shares outstanding times the stock price.  It is a “weighted” index, which means that each company’s “influence” on its performance is directly proportional to its market value.

 

CALCULATION OF YIELD

 

To calculate the yield that changes in the index’s value, the formula is like that used to determine the changes in value of mutual funds, i.e. the value of the index at the end of the period measured,  less the value of the index at the beginning of the period – divided by the value of the index at the beginning of the period. 

 

Example:  If the value of the S&P is 1000 on Jan. 1 1999 and 1200 on Dec. 31, 1999, the yield for 1999 would be 20%. (1200 less 1000 = 200) divided by 1000 = .20

 

2d example: if the value of the S&P dropped by 50 points, then (950 less 1000) divided by 1000 equals a minus .05 or negative 5 percent.

 

S&P 500 index is reported daily in the Wall Street Journal, USA Today and many other newspapers.  The index is reported by the following:

HIGH:  The highest average price the 500 reported during the day reported.

LOW:  The lowest average price the 500 reported during the day reported.

CLOSE:  The index value at the end of the trading day.

NET CHANGE:  The change in the index for that day.

FROM DEC. 31:  The change in the index from December 31 of the previous year.

% CHANGE:  The change in the index from Dec. 31 previous year reported in percentages.

 

There are a few indexed annuities that use other indexes, in particular foreign stocks.  By doing so, the annuitant can participate in the returns of overseas securities.

 

As discussed earlier in this text, the Dow Jones Industrial Average, the Dow Jones Transportation Average, and the Dow Jones Utility Average are considered as the leading indicators of the stock market movement.  Therefore it should be no surprise to discover that some companies are using the Dow Jones Indexes for EIA’s instead of the S&P 500.

 

Which is the best?  The Dow Jones Industrial Average (DJIA) is weighted by price, as opposed to market value of the S&P 500.  This means that within the DJIA, the high-priced stocks carry more weight than those lower-priced stocks.  Therefore, a 3 or 4 % change in the price of a $100 share will have more of an impact on the DJIA than the same change in the S&P 500.

 

Using the S&P 500 as an index, a change in the price of a stock is multiplied by the number of outstanding stock.  Therefore, a change of 3 – 4% in the price of a stock with a small market value will have a much smaller impact than a comparable price of a stock with a large market value.

 

While other indexes may appear, the key point is that it is very necessary to keep the process simple.  Since the S&P 500 and the DJIA are both well known and well regarded, and somewhat understood by the majority of potential customers, there is little chance that any other indexes will have much of an effect.

 

DETERMINING INTEREST RATES - METHODS OF INDEXING

 

Most investors are familiar with indexed mutual funds, but that has little to do with indexing of Equity Index Annuities.  With mutual funds the fund itself purchases stock that comprise the index.  With EIAs, there can be – and is – a variety of indexing methods.  In today’s rapidly changing financial environment, there can be methods that are beneficial if the market goes up, or if it goes down, or if it stays the same, if it goes up and down over a short period of time, etc.

 

Some of the new products have new methods of indexing, but traditionally (if you can have a “tradition” for a 6-year old product) there are six variations and will be discussed in detail.  These are point-to-point, high water mark (look back), annual reset, low water mark, multi-year reset and digital.  The other features of the EIA, such as floors, caps, participation rates/margins, and averaging, may work together with the methods of indexing.

 

Point-To-Point

 

The simplest indexing method is the point-to-point method.  The beginning “point” is the beginning date of the contract, i.e. the day that the premium deposit is made.  The end “point” is the last day of the contract’s initial term.  The difference in the index value between the two points is the amount of interest that will be credited to the annuity.  For the mathematically minded, the formula is simply: The “Beginning Point” is subtracted from the “End Point,” and the result is divided by the Beginning Point.

 

Example:  For simplicity purposes, assume a 5 year EIA with 100% participation and the S&P 500 index is at 1000.  Initial premium deposit is $10,000.  At the end of the initial term, the index stood at 1500.  Therefore, subtracting 1000 from 1500 is 500.  500 divided by 1000 is .50 or 59%.  The full 50% would be credited  (100% participation) and the credited interest would be $5,000 (50% of $10,000)

 

If the market “went south,” the minimum rate would still be 3%.  This is discussed later in this section.  This would be true of any of the methods of indexing used.

 

Some have expressed concern that if the market should “soar to exhilarating heights” during the term of the annuity, but then falls off just before the end of the annuity, the annuitant doesn’t receive the benefits of the increases since only the beginning and ending points are used.  The movement of the market during the annuity term does have an effect, though, as the last (end) point would almost certainly be higher if the trend during the annuity period was continual gains. 

 

The Point-to-Point method of indexing is good in bullish markets, but is very dependent upon a single end point.  A little bad timing at the end could wipe out the result of several upward years.  Another criticisms leveled against this method is that at the end of the second year, or even later years, an annuitant has no way of knowing how much her annuity value will increase.  This has been referred to as the lack of “instant gratification.”  This is similar to the advice of financial “experts” in the stock market, whereby they tell investors, “Don’t look at your stock returns every single day.”  Much easier said than done.  It is human nature to want to know your financial standing at any particular time, or at least be able to approximate it.

 

Vesting, as discussed later, and an averaging technique, serves to alleviate these problems.  For instance, vesting means that at the end of each year, a certain percentage of the account value will be “vested” and credited to the account, subject to participation rates and surrender charges.

 

 

High Water Mark Method

 

The “high-water mark” method is a popular indexing methods, and is used heavily by one of the companies who “started” the modern Equity Index Annuity.  Many agents consider this method as the method that they would like in their “ideal” EIA.

 

As in the point-to-point system, this method uses two points in time: the beginning point is when the premium is deposited into the annuity.  The other point is not an “end” point, but is a point during the annuity period when the index value was the highest.  The mechanics are the same as the point-to-point method, except that the “high” points substitutes for the “end” point.

 

This method satisfies the “instant gratification” problem as the contract holder knows that the value has been locked in when they reach that point.  Therefore, even if the market index declines, it will not have the same negative effect that the point-to-point method has.  It should be noted, however, that most plans using the high-water mark method, use the contract-year-end results, so even if the index has climbed to record highs during the year, and then dropped somewhat at the end of the contract year, the interest will be credited according to the year end index. 

 

It will be noted in this discussion, that on occasion, certain provisions of an EIA will be more conservative in order to allow more liberal provisions elsewhere in the contract.  This is one of those situations.  A product using the High Water Mark method normally has a lower participation rate.  The reason is that the cost to the insurer in investing to compensate for this feature is much higher than in other products.

 

 

Annual Reset Method

 

This is also a method that appears on agent’s “wish lists” as it can be very powerful if the market is right.  Simply put, instead of the index covering the annuity period as a single entity, it allows the experience of each year to stand on its own.  If it were a 7-year annuity, there would be a new calculation at the end of each year.  In effect, it measures the changes in the index with a series of beginning & ending points.  Most new plans now (2001) use this method.

 

Mathematically, the formula is the same as the point-to-point, but it is performed at the end of each year.  If the “end point” minus the “beginning point” is negative at any year, then the index is zero for that year.

 

This type of method suits the Equity Index Annuity perfectly in a lot of ways.  If the market goes up, the annuitant participates through the index method.  However, if the market drops, the annuity will show a zero interest contribution for that year.  (This is where the “floor” comes in, which is usually “zero” in most contracts).  However, and it is a big “however,” the next year the annuitant can start over.  Historically, the stock market usually performs the best after it has reached a substantial low.  Talk about timing!!  The annuitant participates in the “good” years and “just goes along for the ride” during the “bad” years.

 

As good as this product is, there are still a couple of drawbacks.  Nothing is perfect.  One factor is that it is confusing to the ordinary investor, inasmuch as the contract extends over several years but the method operates on an annual basis.

 

The annual reset design is expensive for the insurer.  Since the formulas differ each year, not only the investment costs are high, but also so are the administrative costs.  Therefore (trade-off time again) this method usually has the lowest participation rates of any EIA plans.

 

Perhaps the greatest handicap of the annual reset method is that the interest credited to the account each year is compounded.  Certainly the compounding of interest into the product design would appeal to clients.  However, since this method is very expensive for insurers, some insurers do not include a compounding feature.  Some companies do allow compounding but include a “cap” (described later) which limits the amount of interest credited in any inter-crediting period. 

 

 

Low Water Mark Method

 

Forget the “low” terminology as this method can produce good yields.  Under this method the “end point” is the last day of the contract term.  The beginning point is the contract anniversary date when the index reached its lowest value.  The mathematical formula would be “Earning Point minus the Lowest Point, divided by the Lowest Point.” 

 

The thing that should be emphasized is that the lower the starting point, the higher the index will become.  This method works well in many different environments, however:

 

 

 

Digital Method

 

This is another method renowned for its simplicity.  This method credits a particular rate of return every year that that index is positive; and credits another particular rate of return every year that the index is negative (usually zero).  As an example, if the particular rate of return is 15% and zero (-0-) when the index is negative, either one or the other, hence the “on and off” connotation.  Generally the rate of return for years when the index is positive will continue throughout the policy duration and will not change for the policy duration.

 

The index is evaluated each year.  In comparison to the annual reset method, if there is an upswing in the index performance after a downswing, the annual reset method allows for a substantial increase in the interest credited to the contract for that year.  However, if the contract uses the digital method, then the “upswing” would be restricted to whatever the contract states.

 

The “trade-off” for the digital method pertains to the interest compounding.  Contracts using the digital method may allow for compounding or not, but those that allow for compounding may have a lower rate of interest than those that do not allow compounding.

 

 

Multi-Year Reset

 

The Multi-year Reset method operates much like the Annual Reset method, except that the rate is based on the result of more-than-one year (takes a larger “bite”).  For instance, if the contract term were 10 years, the Multi-year Reset Method would be calculated every two years (or more – in any event it is always less than the contract duration).  At the end of each period, a new beginning reset period is determined and another multi-year period will start.

 

The formula is the typical Ending Period minus the Beginning Period value, divided by the Beginning Period Value.  However for the life of the contract, it would apply at the end of each term.  Using the 2-year example able, that would mean that it would be “reset” every two-year.

 

If the index performance is positive during any multi-year period, the participation rate is applied to determine interest earnings for the contract.  Conversely, if the performance of the index is negative during any multi-year period, no interest is credited to the contract, but also no interest is lost.

If the contract allows compounding of the interest, the results of each multi-year period are multiplied together to determine the total amount of the end-of-term interest.  If the contract allows for simple interest, then the results of each multi-year period is added together.

 

 

Averaging

 

Some persons believe that “averaging” is a method of calculating indexed returns.  Not true.  Averaging is incorporated into many indexing methods however.  Averaging is used so that the experience of a single day cannot be used as the starting point or ending point in indexing.  In April 2000, the markets all took huge losses, including the S&P 500.  What if a contract just happened to have an end-date on the day of the crash!

 

Averaging is accomplished by taking the closing index prices over a pre-determined number of days, adding them together and then multiplying by the number of days.  It can be performed the same way by using months or quarters, but usually it is days. 

 

An averaged point can be either the end point or the beginning point, but usually it is the end point, and is usually averaged during the last year of a point-to-point contract.

 

Averaging accomplishes what shock absorbers do to the ride of a car – it levels out the bumps and holes.  Years when the stock market rises during a year, and then declines toward the end of the year, the averaging will produce excellent results.  However, if the stock prices rise steadily during the year, the return will be halved. 

 

For the mathematically inclined: if the contract has a 7-year term, and averaging is used during the last year, the last year’s average would be: 1st Quarter+2d Quarter+3^rd Quarter+4^th Quarter, the total divided by 4.  Just like in the 4^th grade.

 

What’s Out There?  Summary Of Present Products

 

While there is some disparity in recent surveys, the following percentages are nearly accurate and can show the usage of various features.

 

Types of Premiums

     Single Premium                                                           68%

     Flexible Premium                                                        32%

 

Methods of Indexing

     Annual Reset                                                              50%

     Point-to-point                                                              33%

     High Water Mark                                                        16%

     Others                                                                                       1%

 

Features as Gauged By Use In Current Products

     Participation Rate                                                       65%

     Margin only                                                                   7%

     Margin and Participation Rate                                      3%

     Cap with Participation Rate                                        25%

     Participation &/or Margins that can change                33%

     Averaging                                                                    60%

     Vesting                                                                        20%

     Specified Surrender Charges                                      85%

     Surrender Charges not specified                                 15%

 

Interest Calculation

     Compound                                                                  85%

     Simple                                                                         10%

     Not applicable                                                               5%

 

If Free Withdrawal privileges are available, more than half use a percentage of the indexed value; about 15% use a percentage of premium; around 15% have no privilege for withdrawal and the remainder have some other sort of calculation.

 

THE PURPOSE OF THE EIA

 

Remembering that an EIA is a form of deferred annuity, it is used as a deferred annuity, i.e. it is generally used for long-term investments and for long –term accumulation of funds, Therefore, retirement is an example of what the annuity was designed to do.  Funds accumulate on a tax-deferred basis, which is probably one of the most used feature that is sold in recommending annuities for financial planning.

 

Further, an annuity has many options available when the annuity is “annuitized.”  If the life income option is chosen, the income cannot be outlived – guaranteed. 

 

The Equity Index Annuity has some further features that recommend it for financial planning.  Because the EIA is an (attractive) alternate to other, much riskier, investments, it provides an opportunity to “beat” the rate of inflation and to do so without market risk, while offering a potential for higher market returns.  As most investors know, or are made aware of, over a period of time, investments in equities out-performs the rate of inflation, and have done so better than fixed-interest investments such as Treasury bills and Bonds. 

 

Until the EIA was introduced, if an investor wanted to offset the effects of inflation on their personal retirement savings, there was no vehicle or easy way to do so.  Some investors refused to take the market risk at all, and invested only in guaranteed products.  Even though there is no guarantee as to how the market will perform in the future (or even in the next 15 minutes!), the EIA offers the customer the potential to receive a rate of return that is higher than the rate of inflation.  A survey of mutual fund investors showed that 27 percent of investors in mutual funds were very cautious about taking any risk and would avoid any investments that might be construed as “risky” in any sense. 

 

Some investors, super cautious, believe that they will be better off with their Certificates of Deposits (CDs).  Maybe, but probably not.  The Federal Deposit Insurance Corp. (FDIC) insures any bank CD balances of $100,000.  Investors have actually experienced losses where they had CDs for amounts exceeding $100,000.  Conversely, losses on annuities have only had one loss, and those annuitants did not lose their principal, only the expected return for one year.

 

In addition, annuities almost always carry higher interest earning rates than CDs, and – this is of utmost importance – because their earnings are tax deferred, they actually earn even more because with good planning, their marginal tax rate will be less when they annuitize (so they pay less taxes) then during the accumulation period.

 

One note of caution when EIA’s are used for an IRA.  The contract period must coincide with or be earlier than, the date that the annuitant turns age 70 ½, or severe tax penalties will occur.  This pertains to any IRA, regardless of the type of funding.

 

When discussing an EIA with a customer, as indicated earlier in this text but should be repeated again for emphasis, an EIA should never be directly compared to a registered security.  (In those instances where the EIA is a registered product, then this would not apply).  Any attempt to promote the EIA as a “superior” product can have negative implications.  Presenting a non-registered EIA as if it were a security is a violation of the Securities laws.  However, as good as this sounds and as accurate as the statement is, there will be times when a potential customer who is familiar with mutual funds &/or other investments, will demand some sort of comparison.  Not to provide a comparison under these circumstances could make it appear that the agent is “hiding something,” or he/she is simply not well versed in the product. 

 

How to handle, how to handle??  It is recommended by those with experience in this product, and by companies who are very sensitive to the dividing line between insurance and securities, that:

 

 

To reiterate: A registered security product participates fully in both market gains and market losses.  The amount of the investment (principal) is not guaranteed and they can be purchased for either short-term or long-term investing.  EIAs, however, are purchased by consumers primarily for the purpose of accumulating savings for their retirement

 

Dividends

 

The S&P 500 and nearly all other listed indexes are called “price” indexes, meaning that they reflect only the price of the stocks in the indexes and do not reflect any dividends or reinvesting of dividends.  Therefore, EIA’s that use the S&P 500 index will not reflect dividends.  At one time dividends accounted for 2 to 4 % of the stocks annual returns, but it dropped to a little over 1% of the total return after about 1995.  Therefore since dividend yields are lower than they had been before, it would indicate that they will not have any long-term impact on the market performance.

 

It should be fully understood by the marketer and by the consumer, that buying an EIA that is linked to the S&P 500 is not the same as purchasing stocks in the S&P 500.  This does not mean that the EIA is an “inferior product,” but is just one of the items that the purchaser of an EIA gives up as a trade-off to eliminate the market risk.

 

Since there is a separate S&P index that does reflect dividends, there are a handful of EIA products that have been designed to include dividends.  As will be emphasized in this text, there are only 100 pennies in a dollar, so there will be a trade-off by the EIA having a lower participation rate as explained later.

 

Guaranteed Rate

 

All EIA’s have a guaranteed minimum interest rate, usually 3%.  Why so low?  Insurance products are subject to “non-forfeiture” laws, which specify the minimum interest rate that must be attributed to a policyholder upon the “forfeiture” of the policy, usually annuitization or surrender.  The non-forfeiture provision is a function of state regulations and there may be some differences, however 3% is considered as the “standard.”  Fixed annuities normally apply the guaranteed minimum interest rate to the entire premium deposit each year.  If the insurer declares a higher interest rate, then that rate would apply, but in no circumstances would it be more than 3%.

 

At the end of the contract’s term, the contract holder will receive the greater of:  (1) the guaranteed minimum value of the contract, or (2) the indexed value.

 

TIME LENGTH OF THE EIA

 

The term that is used to define the time length of an EIA is the “Initial Accumulation Term.”  This can vary anywhere from one year to 15 years, but the usual period is 5 to 7 years.  The initial accumulation term has two functions.

(1)  the length of time that the indexed rate of return is applied to the contract, and

(2)  it the length of the surrender period during which surrender charges apply.

 

At the end of the contract period, there is a “window” of (usually) 30 to 45 days for the annuitant to determine if they want to annuitize (cash-out) the annuity, full or partial withdrawal of the funds, or renew the contract for another term.  If no choice is made, some companies will automatically transfer the funds into a fixed annuity.  Others may simply renew the contract for another term.

 

How Much Is Subject To Interest Participation

 

First, it should be pointed out that premiums for EIA’s are in most cases, single premiums, with typical minimum payment of $5,000 or more.  However, some companies are allowing additional premium payments, usually in amounts of $50 to $500.  This is important to know as customers may question as to why, since they have made a large payment, they are initially only going to receive credit for part of the amount.  Secondly, participation rates may differ according to the date that a payment is made.

 

Another rather unique design of the EIA is the “Participation” rate.  This is simply the percentage of the premium deposit and annuity value that will be applied (credited) to the contract.  “Participation” comes from the fact that it determines what percent the contract “participates” in the contract’s indexed return. 

 

In order to determine the actual interest rate applied to the contract, the first step is to determine the yield of the index used.  Then the participation rate (percent) is multiplied by the participation rate to determine the amount of interest to be credited.

 

 

Participation rates can range from 20% to over 100%.  One company uses 100% of the average of the daily closing prices during the year.  The participation rate depends upon the features of the product, i.e. generally if the participation rate is low, the contract has more liberal features in other areas.  Of course it also depends upon the insurer’s internal indexes and cost allocations.

 

A higher participation rate does not necessarily mean that it will result in higher interest crediting, as will be explained later.  Also, most EIA contracts will use the same participation rate throughout the contract term, but some contracts will change participation rates annually.

 

The fact that the EIA collects its premium usually in a rather large lump sum, but the entire amount immediately “reduces” in value (in most plans) can cause questions in the minds of the customer (and the marketer, the first time they see this).  One of the reasons is that most insurance regulations allow an insurer to collect a 10% “load” on an annuity for administrative purposes.  While this is factual, it is of little interest to the consumer.

 

There are two reasons that can be explained to the customer:

 

1. At the guaranteed rate of 3%, for instance, a $10,000 premium deposit will start exceeding $10,000 in value after about 3 ½ years.  If the “math” is done, over $11,000 will be credited to the account after 7 years.

 

1. And most importantly, this product should not be sold to anyone that will have immediate liquidity needs, or needed on an on-going basis, or will need to surrender the contract prior to the contract term.  It cannot be emphasized enough:

 

 

An “alternative” to the participation rate is the “Margin” (also known as the ”spread”) used on some contracts.  The “margin” is subtracted from the indexed yield (instead of being multiplied as with the participation rate).  For instance, the margin rate on a contract may be 5%.  If the indexed yield is 10%, then the interest rate credited to the EIA would be 5% (.10 - .05).

 

The question as to, which is best for the client, frequently arises when discussing margins and participation rates.  Mathematically, different assumptions will produce different results because the two are not mathematically comparable.  Basically, when indexed rates are low, then the participation rates may produce better results, and conversely, when the indexed rates are high, the margin may produce better results.  There may be more technical answers but simply put, “it just all depends,” as one is not comparing apples-to-apples.

 

Margins may be used for any EIA product, but are most commonly used with annual reset products.

CAPS

 

Some – not all – EIA’s have a “CAP” or limit on the amount of indexed interest that can be applied to the contract during a certain period, regardless of how high the indexes may go.  As an example, a contract may have a cap of 12%.  If the market-oriented index soars to 15% in one year, the maximum that will be attributed that year, would be 12%.

 

How is this explained?  The actual and true reason for the cap is that it protects the insurer against “wild fluctuations” or very substantial index increases.  Therefore the insurer is able to offer other attractive features, without which they would not be able to do so.

 

One large broker who sells a substantial amount of EIA’s, and whose remarks have been seconded by many other marketers, in a recent survey by Life Insurance Selling,” stated, in effect that his chief concern for both buyers and sellers of EIA’s, is the cap on returns.  “Inferior products” (his terminology) that cap returns have cost annuitants millions in lost gains.  This is particularly noticeable during 1998 for instance, when the indexed rates would have almost always created returns in excess of 20%.  An annuitant at that time would have been losing 6%.

 

Caps may be applied to any indexing method, but they are generally found on annual reset contracts. 

The Floor

 

The floor is the minimum amount of indexed interest that will be credited to a contract in any one year or over several years and applies only to those contracts that determine index interest annually or multi-year.  In most contracts, this amount is –0- (zero), which means that if the index drops, there will be no interest credited.  But this doesn’t mean that the customer’s account value will lose, it will just remain the same as the previous year.

 

Example:  Participation percentage is 80%.  The first year the indexed percentage is 10%, therefore 8% is credited.  Second year the index drops to 5%, 4% is credited.  The next year the bottom drops out and the index drops to a minus 15%.  In that case –0- would be credited.  The fourth year however, if the index yield increases back up to 5%, 4% would be credited for that year.

 

The Floor should not be confused with the guaranteed minimum interest rate.  The guaranteed minimum interest rate determines the worth of the contract that will be received by the contract owner at the end of the contract term if the indexed amount accumulations are less than the minimum interest rate.  The floor is the worse scenario with respect to the amount of index linked interest credited in any particular year or years.

 

Vesting And Surrender

 

There are two provisions that address early withdrawal of funds, either partially or totally. 

 

“Vesting” allows for partial withdrawals or surrenders and operates much like a pension fund’s “vesting.”  A specified percent each year of the account value at the end of each year is available from the total contract’s value.  For instance, many EIA’s that have this feature allow for an increasing percentage of the cumulative interest credited.  If the contract term is 5 years, for example, the percentages may start at 20% the first year, and increase by 20% increments until 100% of the amount is vested in the 5^th year. 

 

The purpose of this feature is to protect the insurer from early contract surrenders.  An insurance company invests in financial markets that closely approximate the EIA’s that it markets.  If a number of EIA’s terminate early, this means that the insurer will have to cash-in some of its investments to meet the demand for cash because of contract surrenders.  An early termination of investments always is expensive as most financial products have some sort of protection against early termination, or it could occur when the market was down, resulting in the sale of investments at a substantial loss.

 

Mathematically, the beginning year account value is increased by the interest that is credited to the contract.  The vesting percentage is applied to that amount to determine the amount vested. 

 

Surrender charges of EIA’s differ from surrender charges of other fixed annuities.  Usually if there is a vesting provision, there are no surrender charges.  Otherwise, they have a schedule that declines over the number of years the contract is held. 

 

Early surrender of an EIA can mean that the annuitant loses not only the surrender charge, but can lose the interest credited to the account that year.  For instance, if the policy anniversary date is June 1, and the contract is surrendered May 1, the amount that is tendered may be based on the previous year’s account value.  If there had been a substantial increase in the index for the 11 months prior to surrender, this could mean more of a loss than anticipated.

 

ANNUITIZATION

 

The principal purpose of an annuity is to guarantee an income stream after retirement to supplement other retirement income, such as Social Security, pension plans and other investments.  Through the accumulation of funds, the annuitization of an EIA operates just like any other annuity.  The insurance company assumes an interest rate that considers the annuitant’s age, sex and anticipated longevity and whether single or joint annuity.

 

Once the values are annuitized, the amount of the monthly (or other mode) payments will remain the same.  Some insurance companies are attempting to create a product that will index the annuity payments and it is anticipated that both immediate and deferred annuities will offer this feature.

 

The comparison of risk of various planning and investment products can be illustrated by the following:

 

Relationship of Return And Risk

                                                                                                                             (High)

 

                                                                                                                 Commodities

                                                                                                                           Options

R                                                                                                 Limited Partnerships

                                                                                  Individual Stocks

E                                                                      Corporate Bonds

                                                                 Mutual Funds

T                                                       Money Market Funds

                                                     Variable Life Insurance

U                                                 Variable Annuities

                Equity Index Annuities

                             Savings Bonds

R                    Savings Accounts

                     Life insurance

N          Fixed Annuities-(fixed rate)

           Government Bonds

         Certificates of Deposits

       Checking Accounts

       (Low)

R I S K

 

The top of this illustration shows those investments normally considered to be “High Risk.”  The bottom shows those which are normally considered to be “Low to No Risk.”  Following the point made earlier in this text, this illustrates again that the higher the return, the higher the risk.  The top 3 (Commodities, Options and Limited Partnerships) are considered High Risk, the next lower 6 investments are considered as Medium risks and the bottom 7 are considered as Low to No Risk.  An attempt is made to “rank” them in order as to the risk, but some may differ as to the order.  For instance, while a Certificate of Deposit is guaranteed by the FDIC for up to $100,000, a CD for $250,000 would not be as “safe.”  In respect to Government Bonds, this refers to all “governments” that issue bonds, and on occasion a municipality has had to default on its bonds.  So whether a products guaranteed by a “government” is safer than that guaranteed by an insurance company, may be argued any way. 

 

The idea of this illustration is to show that the EIA as an investment is a secure investment, but even though it is first and foremost, a Fixed Annuity, with all the safety thereto, it can be legitimately shown as higher in return and lower in risk than almost any other product.  The EIA “breaks the mold” in investment products, as shown in this illustration, and that, of course, is the attractiveness of the product.

 

The following Comparisons of EIA’s presents information on the principal EIA sold by six of the top 21 companies marketing such products.  The names of the companies are not shown as these charts are for comparison purposes only.

 

 

COMPARISON OF EQUITY INDEX ANNUITIES

.                                                                Co. A                          Co. B                         

No. EIAs offered                                        4                                                              2

SPDA or FPDA                                           SPDA_12 Yr                                         FPDA

Free partial withdrawals:                          Yes-after 1 yr                                       Yes after 1yr

Index values for free part. withdrawal  No                                                           Yes

Surrender charges                                      15% 1^st 5yr, then                                  17.5% decr. to

                                                                      decr. to 0 in 6 yrs                                 0 in 16 yrs

Waivers Nur.Home, Nur.Care,Conf.      None                                                      Confinement waiver

Min. Guaranteed. Cont. value.                                75% 1^st yr prem                                    75% of prem pd yr

                                                                      +87.5% of prem after                        

                                                                      1^st yr-partial surrender

Guarantee Base                                         Accumulated @ 3%                            75% of prem. pd

Guaranteed Min. int. rate                         3%                                                          3% yr 1, varies 2+ yr

Index vehicle                                              S&P500                                                 S&P500, Merrill Lynch

                                                                                                                                      US Master Bond Index

Indexing method                                       Ann.Reset, mo. Averaging                 Annual ratchet (S&P)

                                                                                                                                      Pt. to Pt. (Bond Acct)

Cap on annual earnings                           Yes, 10% ann. Earnings                     Yes, 20% average index

                                                                                                                                      Annual growth rate, 10%

                                                                                                                                      Guar. Renewal yrs

Current participation rate                         100% guaranteed, not                        100% Guar. Adjust annual

                                                                      Adjustable                                           

12-mo. participation rate                         100% over 12 mo.                               100% over 12 months

Potential gains                                            recognized, lockedin                           recognized, lockedin,

                                                                      & credited annually                            & credited annually

Margin or point spread                             No                                                           Yes, 1.5% asset exp. Chg

                                                                                                                                      Year 1, 5% Mx. Guar. Renew.

COMPARISON OF EQUITY INDEX ANNUITIES

 

.                                                                Co. C                                      Co. D             

No. EIAs offered                                        5                                                                              3

SPDA or FPDA                                           SPDA – 8 yrs                                                        SPDA, 7 or 9 yrs

Free partial withdrawals:                          Yes, after 1 yr                                                       Yes,each yr,1 per yr

                                                                      Up to 10% of prem                                            

Index values for free part. withdrawal  No                                                                           No

Surrender charges                                      Level 9% for 8 yrs                                               10-0% in 10 yrs

                                                                      From pol.date.& ea renewal

Waivers Nur.Home, Nur.Care,Conf.      None                                                                      Nurs.Hm.,Term Ill.

Min. Guaranteed. Cont. value.                                90% gtd. Base                                                      90% of prem @3%

Guarantee Base                                         90%                                                                        90% of prem

Guaranteed Min. int. rate                         3%                                                                          3%

Index vehicle                                              S&P 500                                                                S&P 500

Indexing method                                       Annual ratchet                                                     Pt. to Pt. Averaging,

w/final 52 weeks av.

Cap on annual earnings                           No                                                                           No

Current participation rate                         100%                                                                     80% on 9 yr,

                                                                                                                                                      75% on 7 yr. Gtd.

12-mo. participation rate                         95% yr 1, 100% after                                         80% to 100% (varies)

Potential gains                                            recognized, lockedin,                                          accessed only at end  of

                                                                      Credited annually                                                                Indexed Option period

Margin or point spread                             No                                                                           No

                                                                     

 

 

COMPARISON OF EQUITY INDEX ANNUITIES

.                                                                Co. E                                      Co. F              

 

No. EIAs offered                                                        6                                                              6

SPDA or FPDA                                                           FPDA 10 yrs                         `               FPDA – 15 yrs

Free partial withdrawals:                                          Yes, after 1 yr.                                      Yes, after 1 yr, 10% of

                                                                                      10% of acc. Value,                              accumulation value.

                                                                                      one per year                                          one per year

Index values for free part. withdrawal                  Yes                                                         Yes

Surrender charges                                                      10-0% over 10 yrs                               20% to 0% - 20 yrs.

Waivers Nur.Home, Nur.Care,Conf.                      Death or Nur.Home            Surrender charges waived

                                                                                      Rider                                                      after 30 days in

                                                                                                                                                      Nursing home or hospital

Min. Guaranteed. Cont. value.                                                3% of 90% prem                                 75% of 1^st yr premium,

Guarantee Base                                                         90% of prem.                                       87.5% of prem.yrs.2+

Guaranteed Min. int. rate                                         3%                                                          3%

Index vehicle                                                              S&P 500                                                S&P 500

Indexing method                                                       Annual ratchet                                     Annual ratchet

Cap on annual earnings                                           Yes, Cap is 11% now                          No

Current participation rate                                         75%w/no average                                               100% 1^st yr, adjusted

                                                                                      Annually                                               annually

12-mo. participation rate                                         70% 5 mos, then 80%                        90% 1^st yr, then 100%

Potential gains                                                            recognized, locked in                          recognized, locked in

Credited annually                                Credited annually

                                                                On anniversary date

Margin or point spread                                             No                                                           No

                                                                     

 

The Maximum-Minimum age for plans from 21 major companies have minimum age of 0, maximum age of 70 to 90, with one company at age 88. 

Minimum premium from these 21 plans is usually $2,000, some at $5,000, one company at $50 per month.

Maximum premium are either $500,000 or $1,000,000.

Surrender values are most often determined by accumulation value less surrender charges.

 

 

THE EIA IN A VOLATILE MARKET

 

Various insurance industry publications, as well as released from insurance companies and brokers that specialize in EIAs, have discussed the EIA from the marketing viewpoint.  Many of those that have written articles or contributed to surveys, etc., are professional financial planners so their opinions are well worth reviewing.  (For purposes of simplicity, the marketing personnel will be referred to as “agents” or “producers,” even though input is from companies and registered representatives).

 

The Market

 

Over the past several years, the economy and the stock market have performed like roller-coasters.  At this time, (2002), the market is down and a total recovery appears to be quite some distance in the future.  Investment vehicles have performed well at times, and not-so-well at other times, and it is fair to say that not all of them have worked well over the changing economic climate.  EIAs have performed as designed, by offering more choices and at the same time, making guarantees and showing a potential for growth. 

 

EIAs and fixed and Variable Annuities, all are appropriate for those who are looking for tax deferral, avoiding probate, privacy and a guaranteed income that the annuitant cannot outlive.  Particularly at this time, those who want the potential of larger gains than available under a fixed annuity and also wants to avoid the downside of the possibility of losing the principal that can occur with a Variable Annuity.  Those that at the present time are the most interested in EIAs are those who are familiar with the stock market and may also have mutual funds, stocks, bonds or other types of equity products.

 

Especially for those people in or near retirement who want to protect their principal and hedge against inflation, the EIA is a good option.  For those who have a longer period of time available to recover from a market downturn and are willing to invest over a longer period, a Variable Annuity may serve just as well.

 

Because of the relative newness of the product, there have been a lot of changes since introduction.  There are more indexing options available, more riders, more flexibility, more distribution options, many more duration period.

 

 

Generally, the EIA has been recommended to those clients who want to improve their return on investments, compared with a CD, for example.  Some clients have done well with other investments and now want to save their gains for retirement and still “participate” in the market without the attending risk of other investments.  Other potential customers are bondholders, charities with money in other “safe” investments and those with under-performing annuities, or those with no surrender charges on their annuities.

 

One successful producer of EIAs states, “The only situation in which I do not recommend the EIA is when a customer is looking for a fixed income.”  The usual purchaser is over 50 and has over $100,000 to invest.  One common characteristic of EIA prospects appears to be those persons who have identified a part (or all) of their investment portfolio that they do not want to expose to risk, but still wants an alternative to fixed interest investments.

 

Another highly successful broker maintains that “almost everyone” is a potential EIA customer.  There is a new category of “super-wealthy” individuals who do not want to lose their money, but still wants to participate in the Bull market when it reappears.  These people believe in long-term gain potential but still want to lock in past gains.  Those prospects, who have identified “safe money” as part of their savings plan, are “naturals” for EIA’s.

 

Perhaps because so many producers are also registered representatives, several professionals have stated that the EIA should not be presented to the prospect as an alternative to investing in the market itself.  They inform their prospects that the EIA is “different money” as it fills different needs, and is in a classification all of its own or risk-based products and solutions.  The consumer, who is uncomfortable with money invested directly in the stock market and inVariable Annuities and mutual funds, may be an excellent prospect for EIA’s. 

 

In some fashion or other, most producers classify prospects into one of the following categories:

 

1. Those with money or designated savings or insurance plans that they want to protect with products that are conservative and use guarantees for both the downside and the upside fluctuations.

 

1. Those that have money gained from the stock market over the past 10 - 12 years, but are nervous about the long term and want to move some of their money into guaranteed products.

 

1. Investors who don’t think that the present bull market will continue and want to move their 401(k) or 403(b) accounts into EIAs.

 

1. Baby-boomers, who have 20 years or more to save for retirement, but want to diversify their plan with a guaranteed alternative.  They may not have much faith in their being a Social Security “floor” for their retirement income.

 

 

CHAPTER 7 – STUDY QUESTIONS

 

1. The difference between an Equity Indexed Deferred Annuity and a regular Fixed De-ferred Annuity is the

A. amount of commission that is paid.

B. regular annuity is an insurance product and the EIA is not.

C. method in which the interest is credited to the account.

2. The most commonly used index to determine the interest rate credited in an Equity In-dexed Annuity is

A. Dow Jones industrial average.

B. Standard & Poor’s 500 index.

C. Adjustable Rate Mortgage (ARM) index.

3. The main difference between an indexed annuity and an indexed mutual fund is the

A. indexed mutual fund is guaranteed to perform at the rate of the index and the an-nuity is not.

B. indexed annuity is guaranteed by the assets of the insurance company not to lose the original principal and the mutual fund is not.

C. indexed annuity is regulated by the Securities & Exchange Commission and the mutual fund is regulated by the state insurance department.

 

4. The simplest method of indexing is know as

A. Averaging.

B. Multi-year reset.

C. Point-to-Point.

5. The High Water Mark indexing method performs best when the

A. market peaks early during the beginning of the contract and declines during the rest of the contract.

B. market is highly volatile over the contract term.

C. market takes a deep dive in the early part of the contract term then rises during the balance of the contract.

6. The main purpose of an EIA, considering it is a deferred annuity, is

A. for retirement.

B. short term stock market investment.

C. to provide funds for the payment of estate taxes.

7. When an EIA is used as the funding for an IRA, what should be a note of caution?

A. Not to over fund.

B. The contract period must coincide with IRA rules concerning annuitization prior to age 50 ½ or after 70 1/2.

C. Not to under fund.

8. The Equity Indexed Annuity

A. is issued by an insurance company.

B. is a security product.

C. is the same as a Fixed Deferred annuity.

9. Comparing the performance of a CD which pays 3% interest to an indexed annuity that guarantees 3%, which product should show a better return in the long run?

A. the CD.

B. both would return the same.

C. the EIA.

 

10. A registered security product

A. participates fully in stock market gains and losses.

B. is sold by insurance agents.

C. guarantees a profit on the investment.

 

 

 

 

 

ANSWERS TO CHAPTER SEVEN REVIEW QUESTIONS

1C    2B     3B     4C     5A     6A     7B     8A     9C     10A