Monday, May 09, 2005
Equity Index Annuities
Again, we are going over the article on 4/25 where all credits are posted as to the publisher of the article. My comments are in red.
Indexing Methods.
As described in the table below, there are several methods for determining the change in the relevant index over the period of the annuity. These varying methods impact the calculation of the amount of interest to be credited to the contract based on a change in the index.
1) Annual Reset
Compares the change in the index from the beginning to the end of each year. Any declines are ignored.
Advantage: Your gain is "locked in" each year.
Disadvantage: Can be combined with other features, such as lower cap rates and participation rates that will limit the amount of interest you might gain each year.
[This is the most popular feature and for the most part, it is highly advantageous. IT is because when you lock in a gain for the year, you can never lose that gain. This feature comes in bi-annual reset also. However, for the most part, annual reset can be a huge benefit.]
2) High Watermark
Looks at the index value at various points during the contract, usually annual anniversaries. It then takes the highest of these values and compares it to the index level at the start of the term.
Advantage: May credit you with more interest than other indexing methods and protect against declines in the index.
Disadvantage: Because interest is not credited until the end of the term, you may not receive any index-link gain if you surrender your EIA early. It can also be combined with other features; such as lower cap rates and participation rates that will limit the amount of interest you might gain each year.
[While this seems like a great feature, the insurance companies generally 'mitigate' your potential gains by putting many stipulations on this type of benefit.]
3) Point-to-Point
Compares the change in the index at two discrete points in time, such as the beginning and ending dates of the contract term.Advantage: May be combined with other features, such as higher cap and participation rates, that may credit you with more interest.Disadvantage: Relies on single point in time to calculate interest. Therefore, even if the index that your annuity is linked to is going up throughout the term of your investment, if it declines dramatically on the last day of the term, then part or all of the earlier gain can be lost. Because interest is not credited until the end of the term, you may not receive any index-link gain if you surrender your EIA early.
[Point to Point simply means they take a snapshot of where the index is at one point and a snapshot at another point sometime down the road (usually 1 year later) and determine if the market is up, down or flat in that time period. This is usually a pretty clean and straight-forward method. The disadvantage comes when a market stays high only to go lower when your 'point' is coming up]
We will continue this session on indexing in the next day or two. Thank you.
Ignorance is Not Bliss.
Click Here for Great Annuity Resources
Indexing Methods.
As described in the table below, there are several methods for determining the change in the relevant index over the period of the annuity. These varying methods impact the calculation of the amount of interest to be credited to the contract based on a change in the index.
1) Annual Reset
Compares the change in the index from the beginning to the end of each year. Any declines are ignored.
Advantage: Your gain is "locked in" each year.
Disadvantage: Can be combined with other features, such as lower cap rates and participation rates that will limit the amount of interest you might gain each year.
[This is the most popular feature and for the most part, it is highly advantageous. IT is because when you lock in a gain for the year, you can never lose that gain. This feature comes in bi-annual reset also. However, for the most part, annual reset can be a huge benefit.]
2) High Watermark
Looks at the index value at various points during the contract, usually annual anniversaries. It then takes the highest of these values and compares it to the index level at the start of the term.
Advantage: May credit you with more interest than other indexing methods and protect against declines in the index.
Disadvantage: Because interest is not credited until the end of the term, you may not receive any index-link gain if you surrender your EIA early. It can also be combined with other features; such as lower cap rates and participation rates that will limit the amount of interest you might gain each year.
[While this seems like a great feature, the insurance companies generally 'mitigate' your potential gains by putting many stipulations on this type of benefit.]
3) Point-to-Point
Compares the change in the index at two discrete points in time, such as the beginning and ending dates of the contract term.Advantage: May be combined with other features, such as higher cap and participation rates, that may credit you with more interest.Disadvantage: Relies on single point in time to calculate interest. Therefore, even if the index that your annuity is linked to is going up throughout the term of your investment, if it declines dramatically on the last day of the term, then part or all of the earlier gain can be lost. Because interest is not credited until the end of the term, you may not receive any index-link gain if you surrender your EIA early.
[Point to Point simply means they take a snapshot of where the index is at one point and a snapshot at another point sometime down the road (usually 1 year later) and determine if the market is up, down or flat in that time period. This is usually a pretty clean and straight-forward method. The disadvantage comes when a market stays high only to go lower when your 'point' is coming up]
We will continue this session on indexing in the next day or two. Thank you.
Ignorance is Not Bliss.
Click Here for Great Annuity Resources
