The SEC's New Bulletin on Indexed Annuities
From the Desk of Jim Eccleston at Eccleston Law LLC:
The Securities and Exchange Commission's Office of Investor Education and Advocacy recently issued a bulletin to educate investors about indexed annuities. Indexed annuities are complex products, and as such investors should carefully read the indexed annuity contract and any prospectus, before buying the annuity. Let's highlight the key points of the bulletin.
First, an indexed annuity is a type of annuity contract between an investor and an insurance company. It generally promises to provide returns linked to the performance of a market index. There are two phases to an annuity contract: the accumulation (savings) phase and the annuity (payout) phase. During the accumulation phase, an investor makes a payment or a series of payments to the insurance company. During the annuity phase, the insurance company makes periodic payments to the owner of the indexed annuity.
Second, any positive or negative changes to a market index affect the amount of money in an indexed annuity. Each annuity contract contains a specified time period, usually 12 months. The specified time period is a basis for the calculation of the return. Indexed annuity contracts should describe calculations of the return and indexing method.
Third, an indexed annuity generally promises to provide a return linked to the performance of an index. If the index has a gain, the contract value of the indexed annuity will also increase. However, an investor may lose money on indexed annuity if the market index goes down in value. The indexed annuity may offer some limited protection against some common risks. Some common protections include:
Floor. This protection limits investor exposure to a set percentage of potential loss. For example, if the floor is 10% and the index decreases by 12%, investor would only lose 10% of the annuity contract value.
Buffer or Shield. This protection offers a set percentage of loss that the insurance company is willing to absorb before deducting value from the indexed annuity. For example, if the shield is 10% and the index decreases 12%, an investor would only lose 2% of annuity contract value, before considering any adjustments imposed by contract terms such as surrender charges.
Fourth, different indexed annuities use different indexing methods. The indexing methods determine how the change in the variable annuity's return is determined. This return is then applied to your indexed annuity.
Finally, an investor can lose money by buying an indexed annuity in any of the following ways:
Withdrawals during the specified time period. An investor may lose some of the principal invested in certain indexed annuities if they withdraw amounts before the end of the time period.
Surrender charges. The surrender period is a set period of time that typically lasts six to ten years, or even longer, after the purchase of the annuity. If investors take all or part of their money out during the surrender period, they may have to pay a surrender charge.
Tax penalty. Under the current tax law, if investors takes all or part of their money from a tax-deferred indexed annuity before they reach the age of 59½, they may have to pay a 10 percent federal tax penalty.
Market Index drop. Investors may lose money in some indexed annuities if the market goes down.
Insurance company failure. Many indexed annuities promise to make payments many years into the future. However, all amounts payable are subject to the ability of the insurance company to pay.
The attorneys of Eccleston Law LLC represent investors and advisors nationwide in securities and employment matters. The securities lawyers at Eccleston Law also practice a variety of other areas of practice for financial investors and advisors including Securities Fraud, Compliance Protection, Breach of Fiduciary Duty, FINRA Matters, and much more. Our attorneys draw on a combined experience of nearly 65 years in delivering the highest quality legal services. If you are in need of legal services, contact us to schedule a one-on-one consultation today.
Related Attorneys: James J. Eccleston
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