ATTORNEY NEWSLETTER
Seniors who have or are thinking about purchasing an equity-indexed annuity (EIA) should be aware of the advantages and disadvantages that come with an equity-indexed annuity. Some sellers of annuities include Massachusetts Mutual Life Insurance Company, Principal Life Insurance Company, Jackson National Life, Pacific Life Insurance Company, Aviva Life and Annuity Company, Athene Annuity & Life Assurance Company, Genworth Life Insurance Company, Midland National Life Insurance Company, Bankers Life and Casualty Co, North American Company for L&H Ins, Security Benefit Life Insurance Company, EquiTrust Life Insurance Company, and Guggenheim Life and Annuity. An equity-indexed annuity is a type of deferred annuity that bases its returns on a stock market index, usually the Standard & Poor’s 500.
There are three methods of calculating the change in the stock market index, and each result in a different amount of interest. Insurance companies may use one of the three methods. Depending on the calculation method used, and whatever limitations the insurance companies may impose in addition to the calculation method, seniors and elders may receive less than their expected interest gain.
The first calculation method is the Annual Reset or Rachet. This method compares the index at the end of the year to the index at the beginning of the year. The advantage is that the gain ends up fixed. However, insurance companies may limit the amount of interest gained by imposing cap rates and participation rates that are lower than average. Thus, even if there is a high gain, the payout to seniors and elders may be lower than the actual amount.
The second calculation method is the High Water Mark. It looks at the index throughout the contract, takes the highest value, and compares these values to the index at the start of whatever term length is being used. The result is potentially higher interest and protection against index declines. However, seniors run the risk of not receiving anything if they surrender their equity-indexed annuity early and, like the Annual Reset method, insurance companies may impose cap rates and participation rates to limit the amount of interest gained.
The final calculation method is Point-to-Point. Insurance companies choose two points during the contract term and compare the index at each point. The benefit to this is that insurance companies may provide higher cap rates and participation rates (unlike the other two methods) that result in a higher interest gain. However, the downside is that the interest gain is dependent upon one random point. If the stock-market index is increasing at one point but then declines later and a point post-decline is chosen, seniors and elders will receive a lower amount of interest. In addition, like the High Water Mark calculation method, if seniors and elders surrender their equity-indexed annuity early, seniors and elders may receive nothing at all.
Because an equity-indexed annuity is a type of deferred annuity, seniors and elders should remember there is a surrender charge, usually high, associated with early withdrawals. In addition, like all other annuities, there are no tax advantages. Finally, seniors and elders run the risk of actually losing money if they surrender their equity-linked interest early or if the stock market index declines.
Some sellers of annuities make annuities sound like a good idea. However, the reality is that annuities are usually bad for seniors. Before purchasing an annuity, consult with friends and family and thoroughly educate yourself on the pros and cons to any annuity.
The Evans Law Firm Inc. handles insurance/banking fraud, consumer class action fraud, and financial elder abuse. If you bought an annuity policy in California that you would like a free and confidential legal evaluation of, contact The Evans Law Firm at 415-441-8669 or email info@evanslaw.com.
