Top Class Actions’s website and social media posts use affiliate links. If you make a purchase using such links, we may receive a commission, but it will not result in any additional charges to you. Please review our Affiliate Link Disclosure for more information.
Indexed Annuity Overview
Indexed annuities are insurance contracts that go by a few different names, including Equity Indexed Annuities or EIAs. EIAs are complex and some consumers say that they were duped into buying one of these annuities based on false projections provided by insurance companies. Read on to learn more about indexed annuities.
What Is an Indexed Annuity?
According to Investopedia, indexed annuities are characterized by the payment of interest based on the performance of a stock market index. Indexes include the S&P 500 or Dow Jones. Fixed annuities are different, notes Investopedia, because they pay a fixed interest rate, as are variable annuities that base their interest payments on securities selected by the investor.
How Do Indexed Annuities Work?
As noted above, the payments an annuity holder receives with this product is based on the rate of return a stock market index. According to Investopedia, the rate is based on the average monthly gain of the selected index over the course of a year.
In addition, payments will also be determined by an “indexed annuity participation rate.” Participation rates refer to limits that are set on the potential gains of the selected stock market index. Investopedia notes that participation rates can reduce the payments to annuity holders; rates can be set at 100%, meaning the annuity holder will be paid all of the stock market index gain, or as low as 25%.
Further, indexed annuities are subject to yields and rate caps. These caps limit the gains further, says Investopedia, capping the participation rate percentage.
Indexed Annuity Pros and Cons
Indexed annuities are touted as a way for retirees to protect their income from downturns in the stock market. Indeed, according to Simply Safe Dividends, one of the pros of this type of annuity is that it offers account holders gains in years the stock market is doing well, but will not cause the amount in their account to decline if the stock market is not doing well.
However, indexed annuities are complex, and regular investors often have a hard time comparing products and determining whether this type of annuity is appropriate.
One issue is the use of a rate of return and indexed annuity participation rate. How the average monthly gain is calculated can significantly affect the gains an account holder will see with an indexed annuity. The participation rate can also further limit these gains.
Additionally, according to Investopedia, the rate of return and participation rate can also change under the terms of certain indexed annuities, further complicating the product.
Alert on EIAs
Indeed, the Financial Industry Regulatory Authority has issued an alert on Equity Indexed Annuities because of this complexity.
“Sales of equity-indexed annuities (EIAs) have grown considerably in recent years,” points out the alert. “Although one insurance company at one time included the word ‘simple’ in the name of their product, EIAs are anything but easy to understand. One of the most confusing features of an EIA is the method used to calculate the gain in the index to which the annuity is linked. To make matters worse, there is not one, but several different indexing methods. Because of the variety and complexity of the methods used to credit interest, investors will find it difficult to compare one EIA to another.”
Critics say that EIAs are often marketed as risk-free growth, but these products often do not provide the returns that account holders envision. According to a report published by Reuters, EIAs provide low long-term returns. Low returns can put retirement income in jeopardy – funds can be eaten up by inflation and investors can even run out of money.
Indexed Annuity Legal Issues
Consumers also claim that insurance companies have been using misleading marketing materials to sell indeed annuities, including false projections and account value increases.
In fact, Forbes warns consumers against indexed annuities. According to one expert, insurance companies have been using deceptive and unethical marketing practices to dupe consumers into purchasing EIAs and then refusing to allow account holders to divest under the terms of their contract.
The expert, a fee-only financial advisor, noted concerns about how insurance companies are targeting senior savers. Forbes also points out that insurance companies are not subject to the same regulatory requirements that protect prospective investors from behaviors that are not in their customers’ best interests.
Several companies that may be selling indexed annuities using false advertising about their rate of return include:
- American General/AIG
- Athene
- Minnesota Life
- Nationwide
- North American
