8 Spooky Truths About Annuities

Truth Number 1

There can be times when the market goes up and your equity indexed annuity will get 0% credit.  One annuitiesbookcover3dmodified
of the methods used in an equity indexed annuity contract to determine what interest will be credited to your account is called Point-to-Point. This method credits the interest only at the end of the equity index annuity’s term (end of year). What that means is at the end of each year they take a monthly average to determine if there is to be a credit given. For example. Let’s assume that over the next year we have the following monthly returns from the S&P 500 index.

Monthly Point to Point with 2% Cap


   Month                                       S&P 500

1.    8%                                              2% cap
2. – 6%
3. – 4%
4.    4%                                              2% cap
5. – 6%
6. – 4%
7.    6%                                              2% cap
8. – 5%
9. – 4%
10.  9%                                              2% cap
11.   4%                                             2% cap
12.  8%                                              2% cap

Total 10%                               Actual 0%

As you can see, over the past 12 months we averaged 10% from the S&P 500. A monthly point-to-point crediting method with a 2% cap, (remember that the cap is on the upside, not the downside) all of the positive months, capped at 2% are added together with all of the negative months (not capped) to arrive at total performance for the year. In this case negative. If the total performance is negative, then based on this method, 0% is credited to your annuity. So even though the overall performance in the index is positive, the net result is lost opportunity. This means the insurance company just made a lot of money off your money.The insurance company understands that the market will go up and down, but if you stay invested, they will make money in the long run.

At some point you will most likely be approached by someone trying to sell you an equity indexed annuity.  When you are approached to buy one of these contracts they will probably tell you things
like, “When the market goes up, you participate in the gains, but when the market goes down, you won’tannuitiesbookcover3dmodified lose anything.” Or, “This is a way to guarantee your investments against loss.” They will try to make this contract sound simple and easy to understand.  However, there are several truths you should know before buying an annuity that they will most likely not tell you about. Fill out the short form below to get your complimentary copy of our free report titled, “7 Truths To Know About Annuities.”

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