Military Officer - February 2006 - (Page 44) financialforum EIAs Decoded Equity-indexed annuities (EIAs) promise stock market returns with little or no risk. But do they deliver? Phil Dyer, CFP, examines these complex products. E Study up on EIA Restrictions ■ Most EIAs are regu- lated by state insurance commissioners, not the Securities and Exchange Commission. For more information, go to www .sec.gov/investor/pubs/ equityidxannuity.htm. IAs are a type of fixed annuity with a minimum interest rate guarantee that credits additional interest based on the performance of a stock market index it is tied to (such as the Standard and Poor’s (S&P) 500 Index), using one of more than 30 different interest-crediting formulas. Lured by the prospect of high returns and low risk, investors poured more than $13 billion into EIAs during the first half of 2005, according to an Oct. 15, 2005, Wall Street Journal article. EIAs reward salespeople with high commissions, up to 8 percent. But are they a good deal for investors? Understanding these components can help you decide. ■ Participation rate: This is the percent of the underlying index that is credited to your account. It typically ranges from 50 percent to 90 percent. For example, if the participation rate is 70 percent and the index to which it is tied advances 9 percent, the interest credited to your account would be 7.2 percent. A 70 percent participation rate against the S&P 500 simple price index only credits 4.76 percent. Most EIAs use a simple price index that doesn’t credit dividends. In the past 40 years, the S&P 500 index has averaged 10.4 percent including dividends, but only 6.8 percent without dividends. ■ Return cap: This is the maximum amount of interest you can earn, regardless of the underlying index returns. Some EIAs have no caps, but many impose a return cap. ■ Margin, spread, and administrative fees: the underlying index returns 8 percent, but the spread is 3 percent, only 5 percent is credited to the EIA. ■ Guaranteed or minimum interest: The minimum interest rate guaranteed on an EIA is typically between 1.5 percent and 3 percent. However, that minimum usually is only guaranteed on 90 percent of premiums paid, and there often is no guarantee on withdrawn amounts. ■ Surrender charges: EIAs come with hefty surrender charges and long surrender periods (the current average is 10 years, but some approach 20 years). Typically, the more attractive the interestcrediting terms or other bonus features, the stiffer the surrender penalties. Confused yet? As if EIAs weren’t complicated enough, many contracts allow insurance companies to change participation rates, caps, and guaranteed interest on an annual basis. EIAs could be a poster child for the adage, “Never invest in something you don’t understand.” These complex products with many moving parts are so complicated that even some people selling them can’t adequately explain them. Make sure you do your homework before signing on the dotted line. MO — Former Army Capt. Phil Dyer, CFP, is deputy director for financial education, Benefits Information. For financial advice, members can contact Garrett Planning Network at (866) MOAA-GPN (662-2476) or www.garrettplan ning.com, or visit www.moaa.org/financialcen ter for other resources. PHOTO: GREG SCHALER Sometimes these are deducted from the return instead of a participation rate. If 44 MILITARY OFFICER FEBRUARY 2006 http://www.sec.gov/investor/pubs/equityidxannuity.htm http://www.sec.gov/investor/pubs/equityidxannuity.htm http://www.sec.gov/investor/pubs/equityidxannuity.htm http://www.garrettplanning.com http://www.moaa.org/financialcenter http://www.garrettplanning.com http://www.moaa.org/financialcenter
For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.