Introduction to Indexed Annuities

Sheryl Moore nationally recognized indexed insurance product expert, educator and workshop trainer. Sheryl is also the developer and distributor of Life Specs and Annuity Specs, the nation's leading due diligence indexed insurance software for policy provisions and sales data.

The insurance company must pay out a minimum guaranteed surrender value, regardless of what they earn on their investments. The minimum guarantees on Indexed products are lower than those of a Fixed nature, but their potential interest crediting is greater. A client may purchase an Indexed Annuity with a minimum guarantee of 87.5% of premiums, credited at 3.00% interest. The maximum credited interest may not exceed a cap of 8.00%. However, if the market "tanks," and the insurance carrier can only earn 1.00% on their money, the consumer is still protected by the minimum guaranteed surrender value of 87.5% @ 3.00%. For this reason, the insurance carrier holds the risk with an Indexed Annuity.

Participation Rate—the percentage of positive index movement in the external index that will be used in the crediting calculation on an Indexed product. (Note that a product with a Participation Rate may also be subject to a Cap and/or Spread.) A participation rate of 55% would afford the client potential indexed crediting of 11% (20% x 55% = 11%)
Cap—the maximum interest rate that will be used in the crediting calculation on an Indexed product. (Note that a product with a Cap may also be subject to a Participation Rate and/or Spread.) A cap of 8% would pass on potential gains of 8% to the client (20% limited by an 8% cap)
Asset Fee/Spread—a deduction that comes off of the positive index growth at the end of the index term in the crediting calculation on an Indexed product. (Note that a product with a Spread may also be subject to a Participation Rate and/or Cap.) A spread of 3.00% would leave the client with 17% interest credited (20% - 3% = 17%)
Indexed Annuities are also like Fixed Annuities in that they have minimum guarantees to protect the client from a downturn in current credited rates or caps, etc. These guarantees are very different, on the other hand. Fixed Annuities express their minimum guaranteed rates as a guaranteed annual return rate. If the minimum guarantee is 3.00%, and the rate is lowered to that level, the insurance carrier will credit 3.00% annually. On an Indexed Annuity, the product is priced with a less rich guarantee, in order to afford the client higher upside potential interest crediting (as opposed to a Fixed Annuity). IA guarantees are expressed as Minimum Guaranteed Surrender Values (MGSVs) that are based on a percentage of premium, credited with a certain rate of interest. This ensures that if the client were ever to surrender the product, or if the external index did not perform, the client would still receive a minimum guarantee on the product.