Demystifying Annuities: The Single Premium Index Annuity
The annuity landscape is one of the most complicated areas of personal financial planning. With regard to buying an annuity contract, it can be as complex and varied as purchasing a car. For example, you can get a very basic, simplistic vehicle – which perhaps will cost you somewhere around $20,000 or $25,000 – or you could get something very exotic which could cost hundreds of thousands of dollars. Buying an annuity has many different variables to consider.
Understanding the Concept
The concept of an index annuity is a structure that will participate in the performance of the underlying index, such as the S&P 500. It will be able to provide you upside on that index – up to a limited capacity in most circumstances – in exchange for protection of some or all losses.
How does this benefit me?
This has become a very popular product in the marketplace today as investors are looking for market upside without the exposure to the downside. Some of the features and benefits that have attracted investment dollars are the fact that many of these contracts do not have an internal expense ratio – so you're not paying an underlying asset management fee.
Many of these contracts will provide very generous upside potential. In fact, some contracts in the marketplace today are offering 20% protection over six years with an unlimited upside potential on the S&P 500.
What is the catch?
- In most circumstances, you will not participate in the dividend that the index would traditionally provide.
- Contract is going to have a lack of liquidity in most circumstances only allowing you to access 10% of the contract's value per year.
These contracts are quite different than many of the other annuity products sold in the marketplace as the primary intention behind most annuities products is an income stream at a future date.
Most of the indexed annuity contracts are not designed to provide an income stream although riders could be added on to do so.
The bottom line:
We would encourage readers to explore the entirety of the annuity landscape, understanding the pros and cons of each potential category of annuity. Let’s consider a single premium immediate annuity. That trade off is “I'm giving a lump sum to an insurance company in exchange for a stream of income payment for life or for a certain period of time such as 5, 10, or 20 years for example.”
We can also take a look at a fixed annuity. A fixed annuity is a product very comparable to a CD. You are getting a fixed rate of return for a stated period of time. They traditionally do not provide market upside above and beyond the stated return.
Each of these contracts will have pros and cons associated with it and we do recommend working with a Certified Financial Planner to evaluate your situation and what product may be the best fit for you and your family.
Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate.
Ben Soccodato is a registered representative of and offer securities, investment advisory services through MML Investors Services, LLC. Member SIPC. www.SIPC.org 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000 CRN202605-4458560