Index Annuities Starting To Deliver Equity-Linked Returns

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Over the preceding three years, most index annuity owners did not receive any equity index-linked interest.

This meant many producers needed to explain to customers once again how those minimum interest guarantees really worked.

However, the environment has changed. Today, owners of these products are opening up statements that show their policies have credited index-linked interest.

For most owners, this is the first time in three years they have seen this. In fact, its probably the first time they have ever seen it.

So, the products are now starting to deliver on their promises.

The reset annuities using annual point-to-point crediting methodology have been paying equity index-linked returns since early July anniversaries. Furthermore, currently many are crediting at or near their maximum interest caps.

Over the last three months, one-year S&P 500 gains have been double-digit over half of the time (see chart). This has resulted in many index annuity owners “capping out” on their credited interest for the previous year.

Meanwhile, annuities using monthly or daily averaging of index values have experienced fewer periods of index-linked interest. Interest calculated from averaging methods have also been lower, due to the baggage of a really ugly year that dragged down the equity indices to their lowest points in the bear market.

But, regardless of the method used by the annual reset annuities, all annual reset products should be crediting index-linked interest for the remainder of the year. This should occur, even if the stock market remains relatively flat, because last years market indexes were so much lower.

Even if the S&P 500 and the Dow dont rise further this year, annual point-to-point structures will be crediting 5% to 10% returns, and averaging contracts will be crediting 3% to 8%.

Of course, a strong fourth quarter for the stock market could make everybody a lot happier.

To obtain greater insight into these products, advisors and other professionals should review actual index annuity returns by product for not only the previous year, but also covering the entire period index annuities have been available.

is president of The Advantage Group, an index product research and consulting firm in St. Louis, Mo. His e-mail is jack.marrion@gte.net.


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 3, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.