New - Annuity Calculator
A
Safe Place to Grow Your Money
Would you like an investment that pays
gains based on
the stock market, yet helps protect your
principal when
the market declines?
It's not every day that you find the
opportunity for potential growth with true safety in the
same financial vehicle. Usually investors are
compelled to make one of two choices, either they give up a
degree of safety in exchange for a greater potential for
growth or they accept less growth in exchange for a higher
degree of safety.
Thanks to an innovation in the
insurance industry, you can have the potential high returns
available in the stock market and the security of a
guarantee”it's called an equity indexed annuity.
Equity index annuities are excellent
alternatives for investors seeking safety in a low interest
rate environment or a volatile market.
Here's how they work, your return is
based on the increase of a stock or equity index, such as
the S&P 500.
1) If stocks rise, you benefit
from the increase. If stocks fall, you do not lose any
money, most contracts guarantee a minimum return, typically
3%.
2) This is what makes these newer
products so attractive to retired persons and to those
approaching retirement.
Now, imagine this scenario:
Suppose you and I take a trip to Las Vegas for a week.
I decide to make you the following offer. You can
gamble at one of the casinos as much as you like for the
entire week and I will guarantee you in writing that no
matter how bad you do you will not lose. In fact, I
guarantee that you will walk away from the tables with no
less than what you started with, plus some interest.
If you win, you get to keep the winnings.
Would you take me up on the
offer? I would imagine given that opportunity, you
would load up with casino chips as soon as possible.
So, what's the catch?
You can't lose a dime, but the catch
is, you have to play for the whole seven days, otherwise you
may have to give back a small portion of your chips.
In other words, if you invest with the intent to hold your
investments for some time down the road, index annuities can
be a powerful investment. This brief example is
simplified, but in very basic terms, this is the concept
behind equity index annuities.
Obviously, there is no such thing as a
free lunch, so the company that issues the annuity will
limit the maximum returns that you receive from a rising
market in return for the downside protection they
provide. This limit depends on the particular indexing
method that the annuity company uses.
The most common method used to limit
returns is something called the participation rate.
For example, the insurance company may
set the participation at 90% (some companies are as low as
50%), which means the annuity would be credited with 90% of
the growth experienced by the index. If the index
gained 10%, your gain would be 9% for that year.
Essentially, you're trading 100% of the market risk in order
to receive a share of the market gain. In addition to the
different participation options, there are index annuities
that use an annual reset method for crediting index-linked
interest. This valuable method allows you to lock in
gains permanently in an up market. In volatile markets
where the index declines, the annuity simply resets locking
you in at the now lower index level. In fact, some
index annuity renewals have been reset at very attractive
levels. The lower the reset is, the more opportunity
there is for future
growth.
Let's take a
look at another tough time in the market and see how the
index annuity would have performed utilizing the annual
reset method. One of the best examples of a
prolonged bear market was the 1970's, in the 1973-74
downturn stock prices fell more than 40%. The S&P
500 closed at an all time high towards the end of 1972 and
it was not until 1980 that these levels were retraced.
So, if you bought at year-end in 1972, it would have taken
about 7 years to break even using the traditional buy and
hold technique. Utilizing a 90% participation index annuity
with the annual reset method from 1972 to 1979 would have
resulted in a return for those seven years of approximately
70%”even though the index had not yet returned to its former
high.
In today's market environment it's
hard to beat an annuity that only goes up. Many
seniors who fled the stock markets, locked in gains and
purchased equity index annuities. They are now waiting
for an upturn, which will produce further gains for them,
not just a recovery to former highs.
The use of these vehicles has allowed
them some comfort during market declines.
The Equity Indexed Annuity is a safe
vehicle for Investing.
Endnotes
Investors are searching
for Secure Guaranteed investments and gasping to get away
from aggressive stocks. Investors are looking for solid
returns on there investments and Equity Indexed Annuities
are providing this vehicle.
A solid return between 8-13% on your
investment allows for a safe place to grow your
money.
