More Drawn to Annuities That Offer Safety with Stocks

By Martin Skala Contributor to The Christian Science Monitor | The Christian Science Monitor, August 22, 2005 | Go to article overview

More Drawn to Annuities That Offer Safety with Stocks


Martin Skala Contributor to The Christian Science Monitor, The Christian Science Monitor


Can you link the returns on a savings instrument to the stock market and still call it a safe? Surprising as it may seem, you can if you're promoting a type of fixed annuity that promises savers the best of both possible worlds: participation in the stock market's potential growth while avoiding any capital losses.

A creation of insurance companies, equity index annuities (EIAs) guarantee a minimum rate of interest and enable investors to earn extra interest based upon the performance of a securities market index, typically the S&P 500 index. Unlike certificates of deposit, the interest payout is tax-deferred during the annuity's accumulation period, generally seven to 10 years. EIAs also offer protection against loss of principal, a key selling point that also differentiates them from variable annuities.

This hybrid financial product is not legally designated as a security, and therefore isn't regulated by the SEC. That's because an insurance company guarantees the principal amount of the premium and the interest credited to the contract. Variable annuities, by contrast, are deemed securities because the account values fluctuate with the market performance of the underlying equities.

"Indexed annuities are an appealing niche product for consumers looking for the safety and features of a fixed annuity but with the potential for higher yields," says Ken Nuss, president of Annuity Advantage.com, an annuities marketer in Medford, Ore.

Sales of EIAs now account for about a tenth of the $218 billion annuity market. Investors scarred by the 2000-2003 bear market helped propel EIA sales to $23 billion last year, a 66 percent jump from 2003, according to Compendium Advantage, an annuities consulting firm in St. Louis. It forecasts EIA sales to top $28 billion this year.

Sales have also been spurred by the narrowing spread between interest rates paid on traditional fixed annuities and CD rates. Fixed-annuity rates, determined primarily by bond yields earned by insurance companies, have hardly budged over the past year. CD yields, on the other hand, have risen in step with the Federal Reserve's steady increases in the Fed Funds rate over the past year.

In today's world of subdued returns, EIAs are very competitive with other long-term savings instruments, says Jack Marrion, president of Advantage Compendium. Indexed annuities were basically designed to deliver returns averaging about 2 percent or so higher than fixed annuities and they've been successful in doing so, he says. For the 12 months ended July 30, returns on index annuity contracts bought one year earlier ranged widely from 4.5 percent to 11.2 percent. That nevertheless compares favorably with average returns over the same period of less than 2 percent for CDs and 5 percent for bond mutual funds, Mr. Marrion adds.

The investor profile

Index-annuity buyers typically come from two camps, says Mr. Nuss. The first consists of conservative investors whose incomes have been squeezed by the low interest rates available on traditional savings instruments such as CDs. …

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