Jim Feit is a freelance writer in the greater Palm Beach area. He may be reached at (561) 734-5510 Updated
"I'll do my best to answer your questions and help you resolve any uncertainties
about your current annuity holdings. There is no charge for these services."
The One Method of Crediting Gains That Outshines All Others!!
Part 1
By Jim Feit,
Your Friend and Neighbor
Two thoughts prompted me to write this series of articles: (1) my genuine concern for my fellow Seniors' ability to make the right choices unless they are armed with the facts that hopefully will help them avoid bad decisions; and (2) my desire to use my knowledge to do something worthwhile for South Florida's communities.
The only financial product I know that permits us to take advantage of stock market gains without exposure to any stock market loss whatever is the product known as the Equity-Indexed Annuity. Considering the market's extreme downward plunge not too long ago, a Guarantee of this kind is a superb benefit for Seniors who absolutely cannot afford market risk. However, unless you know just how these Annuities work and how to avoid those whose moving parts can severely undermine or even kill any chance for gains you might be better off putting your money into products that pay a fixed rate of interest. It is the absolute responsibility of the agent or planner who sells Equity-Indexed Annuities to recommend only those he or she has personally investigated and determined to provide the greatest opportunities for market-based gains, with no impediments to growth.
With this responsibility in mind, I continually search and study the ever-changing Equity-Indexed Annuity market to determine which of these unique financial products offer their owners the most (and safest) Bang for their Bucks. My criteria for this search are these:
The Annuity must have a 100% Participation Rate currently in force and Guaranteed for the life of the annuity.
Example: If the S&P 500 Index were up 8% for the year, then 8% should be the starting point for computing gain; not the lower figure resulting from any arbitrary reduction in a participation rate that can be lowered at will! I even found Equity-Indexed Annuities whose participation rates could be lowered any time on the insurerís initiative to a mere 20%!! In those Annuities, an annual gain of 10% in the S&P 500 would automatically reduce the starting point for computing gain to 2%!!! And that figure, mind you, is before applying the high administration charge that may be present in Annuities without solid guarantees!
There can be No Fees of Any Kind charged to owners At Any Time, Guaranteed as long as they own the annuity. At all times, 100% of their money must be working for them not being paid out to the insurer.
Example: I was astonished to realize that with some Annuities, these fees can go as high as 8% at the insurer's discretion. Each year, before crediting any gain, these fees are subtracted from any gain realized by the market index being utilized (S&P, Dow Jones Industrial, or other) after first applying the participation rate as explained above. In some annuities under certain circumstances, even a 20% or higher index gain could wind up being credited as 0%! Wow!! Imagine having $100,000 in that kind of Annuity, having a computed gain of $8,000 in a given year, and having it wiped out by an 8% administration or asset fee!!!
A reasonable percentage cap on earnings is acceptable so long as the annual percentage cap has a realistic Guaranteed floor over the entire life of the annuity and there are no annual fees to reduce it.
Example: In my thinking, that guaranteed floor should never be less than 5% in any one year over the life of an annuity, with no annual fees. When an Annuity meets the first two criteria above, I recognize the insurer's need for some leeway in setting a cap on earnings in order to assure its own profitability, especially when it is furnishing a 100% guarantee that no Annuity Owner will ever lose one penny of principal or credited earnings due to a drop in the stock market!
Fortunately, some Annuities offer higher guaranteed minimum cap rates of as much as 7% without charging any fees to reduce them. Beware the Annuity that offers a higher current cap rate: Always ask the percentage of the guaranteed minimum! Moreover, be sure to ask the current and guaranteed maximum fees that are in effect or can be applied against earnings each and every year at the insurer's discretion.
Suppose, for example, we are dealing with an Equity Indexed Annuity that has a 100% current participation rate, a 15% current cap rate and a 2.5% current asset fee. If the market index on which the Annuity's gains are based were to increase, say, by 7% in a given year, the actual credited gain would be 4.5% after subtracting the asset fee. In that same year, however, if the Annuity had a 7% current cap rate with no asset fee, the full 7% index gain would be credited. In my opinion, an Annuity with a high current cap rate, a low guaranteed cap rate, and an asset fee is unlikely to earn you as much over its life span as an Annuity with more closely aligned middle-of-the-road current and guaranteed cap rates, and no asset fee. My personal preference and recommendation would be the latter.
In Part 2 we will explore the many different methods these Annuities use to calculate your gains and why I believe one of them is far superior to all the rest. If any of my statements or explanations in this article have raised a question in your mind or cause you to doubt the value of an Annuity you may already own, please call me at (561) 734-5510 so we can seek the answers together. I'll do my best to answer your questions and help you resolve any uncertainties about your current annuity holdings. There is no charge for these services.
Indexed Annuities
(Part 2)
The One Method of Crediting Gains That Outshines All Others!!
By Jim Feit,
Your Concerned Fellow Senior
In Part 1 we explored three variable features of Equity-Indexed Annuities that greatly affect their ability to make money for their owners. Those three features are participation rates, caps and internal fees. We illustrated why itís important to have reasonable guaranteed minimums for participation rates and caps, and
no fees at all, for the life of an Annuity in order to maximize earnings.
Part 2 will illustrate the superiority of one particular method used in some Equity Indexed Annuities to credit gains, provided no barriers are placed in its way to reduce those gains.
( In most cases, an Equity Indexed Annuity that uses a 1-year point-to-point method of computing gain is preferable to any other method currently being used). Here's why:
Example: Let's examine the most widely used method of crediting earnings the monthly average method in comparison to the 1-year point-to-point. We'll assume the following index values at the end of each month in a calendar year:
Based on these assumptions, the illustrated monthly average method would produce a gross crediting rate of 8.83%, before applying any existing participation rate, cap and/or fee. Using the same beginning and end-of-year values, the 1-year point-to-point method would yield a gross crediting rate of 12% [calculated as end-of-year value (1680) minus the beginning-of-year value (1500) divided by the same beginning-of-year value (1500)].
The monthly average method is usually described as a way of smoothing out any severe ups and downs whenever the market is turbulent, and that is true. However, if the market is higher at year-end than at the beginning, the point-to-point method would produce a higher return, all other things being equal. Market turbulence does not usually worry annuity owners because they know they cannot lose their principal or earnings that have been credited to them if and when the market drops. In other words, because of the annuity's inherent safety, the earnings bottom line at year-end is their chief concern not what happens in-between.
Of course, if the market is lower at year-end than at the beginning, the monthly average method may be able to beat the point-to-point, whose earnings would in that case be 0%. However, if the market were to continually drop during the entire year, both methods would create 0% earnings; but no matter what, no principal or already credited earnings could ever be lost by either method.
Insurance companies know that the point-to-point crediting method is likely to produce bigger earnings for Annuity owners, which means higher payouts for those companies than under the ìmonthly average method. That's why many of them will reduce the participation rate or the cap rate, or both, when the point-to-point method is chosen instead of the ìmonthly average method. When you have a choice of either method, you will need to consider, maybe even do some speculating, on how much these lower participation and cap rates could reduce the earning power of the otherwise superior point-to-point method.
For example, I recently saw a participation rate reduced from 100% to 55% when a 1-year point-to-point method is selected instead of a ìmonthly average. This large difference puts the two methods on a more level playing field for gains. A 45% reduction in the participation rate gives the ìmonthly average method an edge, in my opinion; so that method would be my choice in such an instance.
In the example at the beginning of this article, the effect of reducing the point-to-point participation rate by 45% would lower its 12% gross crediting rate to 6.6%, well below the 8.83% rate shown for the monthly average. However, in other examples reflecting different circumstances, the negative effect could be less or even nil. One way to avoid agonizing over this decision is to split your money between the two methods when both are offered in the same Annuity.
Then there is the high-water-mark version of point-to-point. Starting from a given anniversary date, the highest percentage of growth reached by the market on and over a series of succeeding anniversary dates is the basis for computing the Annuitys account value at the end of that time, usually 5 or more years. Of course, this ìhigh-water-mark figure is subject to whatever cap and participation rate are in effect at that time.
In arriving at that high-point value, both annual gains and losses come into play because there is no ìannual reset when using this method. However, the annual reset is part-and-parcel of the 1-year point-to-point method because the current year's ending value automatically becomes the starting point for measuring the next year's gains. As you know, even if that ending value were to show a loss for that year, there can never be a loss credited to your account. So the lowest amount that can ever be credited to your account is 0 at the end of any given year.
Thus, because you're never starting a new year from less than 0, any increase at all in that year is a gain; but if you were starting from a ìminus figure, you would first have to earn enough to climb back up to 0 before any gain could be realized. (Too bad stocks and mutual funds have no similar1-year point-to-point with annual reset feature with an annuity's guarantees. What a difference that would have made to investors when the market turned so sharply downward!)
In any case, don't let yourself be fooled by words designed to arouse your emotions! Always try to be unemotional and thorough when evaluating the pros and cons of an Equity Indexed Annuity offering. And remember that professional help is readily available if you need it at no cost.
In Part 3 we will examine the variety of Minimum Earnings Guarantees offered by Equity-Indexed Annuities to offset the possibility of poor market performance during the time you own them, and to what degree they should affect your buying decision. If any of my statements or explanations in this article have raised a question in your mind or cause you to become concerned about an Annuity you may already own, please call me at (561) 734-5510 or send me an E-mail at JIMFEIT@aol.comI'll be glad to help. I'll do my best to answer your questions and help you resolve any uncertainties about your current annuity holdings. There is no charge for these services.
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