Jim Feit is a freelance writer in the greater Palm Beach
area. He may be reached at (561) 734-5510
"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."
Minimum Earnings Guarantees: How Important Are They
(Part 3)
By Jim Feit,
Your Friend and Neighbor
January, 2004 - In Part 2 we explored different methods of crediting gains in Equity-Index Annuities and showed why one stands out because it is capable of producing higher gains in most instances.
Part 3 will examine the nature of the Minimum Earnings Guarantees offered by Equity-Index 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.
( Most Equity-Index Annuities have some form of Minimum Earnings Guarantee payable at the Annuityís ending date to reward its Owner for ìsticking it outî just in case the market should go nowhere during the life of the Annuity. That Guarantee becomes effective if at maturity the Annuityís then current accumulated account value is less than the amount of the Guarantee.
A Closer Look: That Guarantee can be expressed in the form of one or more percentages of a percentage of premium contributions, compounded annually, and often dependent on when those contributions are made. However this Guarantee is stated, it should be translated as closely as possible into actual dollars based on the amount and timing of proposed contributions. That is a service an agent should perform for his or her clients without being asked, while at the same time stressing that minimum earnings guarantees should not in most cases be the main criteria on which a buying decision should be based.
Hereís an example. One Equity-Index Annuity with a life of 12 years might provide a Guarantee of 3% annually on 75% of premiums contributed in the first year, and 3% annually on 85% premiums contributed thereafter. Letís suppose $100,000 to be the first yearís contribution. $6,932 would be this Annuityís minimum guaranteed earnings on $100,000 at the end of 12 years, assuming no money is withdrawn prior to maturity. If the stock market should fail to perform as hoped over the life of the Annuity, there might be some small comfort in knowing that minimum earnings would be $6,932. In any case, you could never lose one penny of premium or already credited earnings from any market drop, no matter how severe.
On the other hand, there are also a few ñ very few ñ Annuities that guarantee minimum compounded earnings of 3% annually on 100% of premium contributions. Assuming the same $100,000 initial premium contribution and no early withdrawals, in 12 years the minimum guaranteed earnings would be no less than $42,576 if the Annuityís gains based on stock market performance were any less than that figure.
However, you must realize that the amount of earnings guaranteed is only one of many features that must be evaluated when making a purchase decision. Bear in mind the chief reason for buying an Equity-Index Annuity is to be able to participate in stock market-based gains without any risk of market loss. You purchase this type of Annuity because you are hoping to earn a lot more than whatever amount is being guaranteed on your premium contributions without any risk of losing those contributions or the earnings that are credited to your account. Judging by past market performance over multiple-year periods, earnings guarantees ñ even as high as 3% ñ only represent a fraction of the stock marketís potential for long-term gain!
Remember that you are in a position to benefit from such gains only if your Annuityís features are structured to take advantage of them. Features such as reasonable guaranteed participation and cap rates without the presence of fees, 1-year point-to-point crediting methods and annual crediting of gains that allows them to compound over the remaining time frame of the Annuity ñ these should do far more to enhance your earnings than any minimum earnings guarantee.
As a rule, but not always, higher minimum guarantees go hand-in-hand with reduced guarantees in the important features that govern your potential to benefit from market-based gains, and they could be coupled with internal fees as well. Again, it is the agentís responsibility to be aware of all these facts, to evaluate an Annuityís features thoroughly, and be able to present their pros and cons to you in a balanced manner that enables you to reach a sound decision.
On the other hand, it is completely understandable why, if you are concerned about or have been ìbadly burnedî by the sharp market drop we experienced recently, you would much prefer an Annuity that offers a strong minimum earnings guarantee as well as the opportunity to profit from stock market gains. I certainly would encourage that view if it brings you ìpeace of mindî. In that case, I would urge you to accept the absence or reduction of one or more less significant guarantees if the Annuity has strengthened the benefits and guarantees that most appeal to you.
For example, I know of an Equity-Index Annuity that has an unusually strong minimum earnings guarantee of 3% compounded annually on 100% of contributions, assuming no withdrawals prior to maturity. It also offers a guaranteed 100% participation rate for its life, a 1-year point-to-point method of computing and crediting earnings, and guarantees there will never be any fee or charge at any time. Its time frame to maturity is surprisingly much shorter than the time frame of most Annuities being sold today, and it is offered by one of the worldís leading and strongest insurers. With all these and a number of other benefits, its earnings cap is quite good and has just been increased; however, there is no minimum guarantee on that cap. Nonetheless, because of the other guarantees being offered, the strength of the insurer, the Annuityís relatively short maturity (ideal for older seniors), and its other beneficial features, I would recommend considering it under the right circumstances; but only after learning more about you and your goals, and you are made thoroughly aware of everything you need to know about this Annuity in comparison to others, so youíll be able to make an intelligent decision.
In part 4 we will explore the Annual Reset Feature and how it affects your ability to increase earnings in a fluctuating market. 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,nor do they place you under any obligation whatever.
