New Mexico Administrative Code › Title 13 - INSURANCE › Chapter 9 - LIFE INSURANCE AND ANNUITIES › Part 12 - ANNUITY AND DEPOSIT FUND DISCLOSURE › Section 13.9.12.13 - APPENDIX FOR EQUITY-INDEXED ANNUITIES

Current through Register Vol. 35, No. 13, July 16, 2024
This appendix to the buyer's guide for fixed deferred
				  annuities will focus on equity-indexed annuities. Like other types of fixed
				  deferred annuities, equity-indexed annuities provide for annuity income
				  payments, death benefits and tax-deferred accumulation. You should read the
				  buyer's guide for general information about those features and about provisions
				  such as withdrawal and surrender charges.
WHAT ARE EQUITY-INDEXED ANNUITIES?
An equity-indexed annuity is a fixed annuity, either
				  immediate or deferred, that earns interest or provides benefits that are linked
				  to an external equity reference or an equity index. The value of the index
				  might be tied to a stock or other equity index. One of the most commonly used
				  indices is Standard & Poor's 500 Composite Stock Price Index (the
				  S&P500),1 which is an equity index. The value of
				  any index varies from day to day and is not predictable.
1 S&P is a registered
				  trademark for the McGraw-Hill Companies, Inc., used with permission.
When you buy an equity-indexed annuity you own an insurance
				  contract. You are not buying shares of any stock or index.
While immediate equity-indexed annuities may be available,
				  this appendix will focus on deferred equity-indexed annuities.
HOW ARE THEY DIFFERENT FROM OTHER FIXED
				  ANNUITIES?
An equity-indexed annuity is different from other fixed
				  annuities because of the way it credits interest to your annuity's value. Some
				  fixed annuities only credit interest calculated at a rate set in the contract.
				  Other fixed annuities also credit interest at rates set from time to time by
				  the insurance company. Equity-indexed annuities credit interest using a formula
				  based on changes in the index to which the annuity is linked. The formula
				  decides how the additional interest, if any, is calculated and credited. How
				  much additional interest you get and when you get it depends on the features of
				  your particular annuity.
Your equity-indexed annuity, like other fixed annuities, also
				  promises to pay a minimum interest rate. The rate that will be applied will not
				  be less than this minimum guaranteed rate even if the index-linked interest
				  rate is lower. The value of your annuity also will not drop below a guaranteed
				  minimum. For example, many single premium contracts guarantee the minimum value
				  will never be less than 90 percent of the premium paid, plus at least 3% in
				  annual interest (less any partial withdrawals). The guaranteed value is the
				  minimum amount available during a term for withdrawals, as well as for some
				  annuitizations (see "Annuity Income Payments") and death benefits. The
				  insurance company will adjust the value of the annuity at the end of each term
				  to reflect any index increases.
WHAT ARE SOME EQUITY-INDEXED ANNUITY CONTRACT
				  FEATURES?
Two features that have the greatest effect on the amount of
				  additional interest that may be credited to an equity-indexed annuity are the
				  indexing method and the participation rate. It is important to understand the
				  features and how they work together. The following describes some other
				  equity-indexed annuity features that affect the index-linked formula.
Indexing Method
The indexing method means the approach used to measure the
				  amount of change, if any, in the index. Some of the most common indexing
				  methods, which are explained more fully later on, include annual reset
				  (ratcheting), high-water mark and point-to-point.
Term
The index term is the period over which index-linked interest
				  is calculated; the interest is credited to your annuity at the end of a term.
				  Terms are generally from one to ten years, with six or seven years being most
				  common. Some annuities offer single terms while others offer multiple,
				  consecutive terms. If your annuity has multiple terms, there will usually be a
				  window at the end of each term, typically 30 days, during which you may
				  withdraw your money without penalty. For installment premium annuities, the
				  payment of each premium may begin a new term for that premium.
Participation Rate
The participation rate decides how much of the increase in
				  the index will be used to calculate index-linked interest. For example, if the
				  calculated change in the index is 9% and the participation rate is 70%, the
				  index-linked interest rate for your annuity will be 6.3% (9% x 70% = 6.3%). A
				  company may set a different participation rate for newly issued annuities as
				  often as each day. Therefore, the initial participation rate in your annuity
				  will depend on when it is issued by the company. The company usually guarantees
				  the participation rate for a specific period (from one year to the entire
				  term). When that period is over, the company sets a new participation rate for
				  the next period. Some annuities guarantee that the participation rate will
				  never be set lower than a specified minimum or higher than a specified
				  maximum.
Cap Rate or Cap
Some annuities may put an upper limit, or cap, on the
				  index-linked interest rate. This is the maximum rate of interest the annuity
				  will earn. In the example given above, if the contract has a 6% cap rate, 6%,
				  and not 6.3%, would be credited. Not all annuities have a cap rate.
Floor on Equity Index-Linked
				  Interest
The floor is the minimum index-linked interest rate you will
				  earn. The most common floor is 0%. A 0% floor assures that even if the index
				  decreases in value, the index-linked interest that you earn will be zero and
				  not negative. As in the case of a cap, not all annuities have a stated floor on
				  index-linked interest rates. But in all cases, your fixed annuity will have a
				  minimum guaranteed value.
Averaging
In some annuities, the average of an index's value is used
				  rather than the actual value of the index on a specified date. The index
				  averaging may occur at the beginning, the end, or throughout the entire term of
				  the annuity.
Interest Compounding
Some annuities pay simple interest during an index term. That
				  means index-linked interest is added to your original premium amount but does
				  not compound during the term. Others pay compound interest during a term, which
				  means that index-linked interest that has already been credited also earns
				  interest in the future. In either case, however, the interest earned in one
				  term is usually compounded in the next.
Margin/Spread/Administrative
				  Fee
In some annuities, the index-linked interest rate is computed
				  by subtracting a specific percentage from any calculated change in the index.
				  This percentage, sometimes referred to as the "margin," "spread," or
				  "administrative fee," might be instead of, or in addition to, a participation
				  rate. For example, if the calculated change in the index is 10%, your annuity
				  might specify that 2.25% will be subtracted from the rate to determine the
				  interest rate credited. In this example, the rate would be 7.75% (10% - 2.25% =
				  7.75%). In this example, the company subtracts the percentage only if the
				  change in the index produces a positive interest rate.
Vesting
Some annuities credit none of the index-linked interest or
				  only part of it, if you take out all your money before the end of the term. The
				  percentage that is vested, or credited, generally increases as the term comes
				  closer to its end and is always 100% at the end of the term.
HOW DO THE COMMON INDEXING METHODS
				  DIFFER?
Annual Reset
Index-linked interest, if any, is determined each year by
				  comparing the index value at the end of the contract year with the index value
				  at the start of the contract year. Interest is added to your annuity each year
				  during the term.
High-Water Mark
The index-linked interest, if any, is decided by looking at
				  the index value at various points during the term, usually the annual
				  anniversaries of the date you bought the annuity. The interest is based on the
				  difference between the highest index value and the index value at the start of
				  the term. Interest is added to your annuity at the end of the term.
Low-Water Mark
The index-linked interest, if any, is determined by looking
				  at the index value at various points during the term, usually the annual
				  anniversaries of the date you bought the annuity. The interest is based on the
				  difference between the index value at the end of the term and the lowest index
				  value. Interest is added to your annuity at the end of the term.
Point-to-Point
The index-linked interest, if any, is based on the difference
				  between the index value at the end of the term and the index value at the start
				  of the term. Interest is added to your annuity at the end of the term.
WHAT ARE SOME OF THE FEATURES AND TRADE-OFFS OF
				  DIFFERENT INDEXING METHODS?
Generally, equity-indexed annuities offer
preset
combinations of features. You may have to make
				  trade-offs to get features you want in an annuity. This means the annuity you
				  chose may also have features you don't want.
FEATURES
TRADE-OFFS
Annual Reset
Since the interest earned is "locked in" annually and
						  the index value is "reset" at the end of each year, future decreases in the
						  index will not affect the interest you have already earned. Therefore, your
						  annuity using the annual reset method may credit more interest than annuities
						  using other methods when the index fluctuates up and down often during the
						  term. This design is more likely than others to give you access to index-linked
						  interest before the term ends.
Your annuity's participation rate may change each year
						  and generally will be lower than that of other indexing methods. Also an annual
						  reset design may use a cap or averaging to limit the total amount of interest
						  you might earn each year.
High-Water Mark
Since interest is calculated using the highest value of
						  the index on a contract anniversary during the term, this design may credit
						  higher interest than some other designs if the index reaches a high point early
						  or in the middle of the term, then drops off at the end of the term.
Interest is not credited until the end of the term. In
						  some annuities, if you surrender your annuity before the end of the term, you
						  may not get index-linked interest for that term. In other annuities, you may
						  receive index-linked interest, based on the highest anniversary value to date
						  and the annuity's vesting schedule. Also, contracts with this design may have a
						  lower participation rate than annuities using other designs or may use a cap to
						  limit the total amount of interest you might earn.
Low-Water Mark
Since interest is calculated using the lowest value of
						  the index prior to the end of the term, this design may credit higher interest
						  than some other designs if the index reaches a low point early or in the middle
						  of the term and then rises at the end of the term.
Interest is not credited until the end of the term. With
						  some annuities, if you surrender your annuity before the end of the term, you
						  may not get index-linked interest for that term. In other annuities, you may
						  receive index-linked interest based on a comparison of the lowest anniversary
						  value to date with the index value at surrender and the annuity's vesting
						  schedule. Also, contracts with this design may have a lower participation rate
						  than annuities using other designs or may use a cap to limit the total amount
						  of interest you might earn.
Point-to-Point
Since interest cannot be calculated before the end of
						  the term, use of this design may permit a higher participation rate than
						  annuities using other designs.
Since interest is not credited until the end of the
						  term, typically six or seven years, you may not be able to get the index-linked
						  interest until the end of the term.
WHAT IS THE IMPACT OF SOME OTHER EQUITY-INDEXED ANNUITY
				  PRODUCT FEATURES?
Cap on Interest Earned
While a cap limits the amount of interest you might earn each
				  year, annuities with this feature may have other product features you want,
				  such as annual interest crediting or the ability to take partial withdrawals.
				  Also, annuities that have a cap may have a higher participation rate.
Averaging
Averaging at the beginning of a term protects you from buying
				  your annuity at a high point, which would reduce the amount of interest you
				  might earn. Averaging at the end of the term protects you against severe
				  declines in the index and losing index-linked interest as a result. On the
				  other hand, averaging may reduce the amount of index-linked interest you earn
				  when the index rises either near the start or at the end of the term.
Participation Rate
The participation rate may vary greatly from one annuity to
				  another and from time to time within a particular annuity. Therefore, it is
				  important for you to know how your annuity's participation rate works with the
				  indexing method. A high participation rate may be offset by other features,
				  such as simple interest, averaging, or a point-to-point indexing method. On the
				  other hand, an insurance company may offset a lower participation rate by also
				  offering a feature such as an annual reset indexing method.
Interest Compounding
It is important for you to know whether your annuity pays
				  compound or simple interest during a term. While you may earn less from an
				  annuity that pays simple interest, it may have other features you want, such as
				  a higher participation rate.
WHAT WILL IT COST ME TO TAKE MY MONEY OUT BEFORE THE
				  END OF THE TERM?
In addition to the information discussed in this buyer's
				  guide about surrender and withdrawal charges and free withdrawals, there are
				  additional considerations for equity-indexed annuities. Some annuities credit
				  none of the index-linked interest or only part of it if you take out money
				  before the end of the term. The percentage that is vested, or credited,
				  generally increases as the term comes closer to its end and is always 100% at
				  the end of the term.
ARE DIVIDENDS INCLUDED IN THE INDEX?
Depending on the index used, stock dividends may or may not
				  be included in the index's value. For example, the S&P500 is a stock price
				  index and only considers the prices of stocks. It does not recognize any
				  dividends paid on those stocks.
HOW DO I KNOW IF AN EQUITY-INDEXED ANNUITY IS RIGHT FOR
				  ME?
The questions listed below may help you decide which type of
				  annuity, if any, meets your retirement planning and financial needs. You should
				  consider what your goals are for the money you may put into the annuity. You
				  need to think about how much risk you're willing to take with the money. Ask
				  yourself:
Am I interested in a variable annuity with the potential for
				  higher earnings that are not guaranteed and willing to risk losing the
				  principal?
Is a guaranteed interest rate more important to me, with
				  little or no risk of losing the principal?
Or, am I somewhere in between these two extremes and willing
				  to take some risks?
HOW DO I KNOW WHICH EQUITY-INDEXED ANNUITY IS BEST FOR
				  ME?
As with any other insurance product, you must carefully
				  consider your own personal situation and how you feel about the choices
				  available. No single annuity design may have all the features you want. It is
				  important to understand the features and trade-offs available so you can choose
				  the annuity that is right for you. Keep in mind that it may be misleading to
				  compare one annuity to another unless you compare all the other features of
				  each annuity. You must decide for yourself what combination of features makes
				  the most sense for you. Also remember that it is not possible to predict the
				  future behavior of an index.
QUESTIONS YOU SHOULD ASK YOUR AGENT OR THE
				  COMPANY
You should ask the following questions about equity-indexed
				  annuities in addition to the questions in the buyer's guide to Fixed Deferred
				  Annuities.
* How long is the term?
* What is the guaranteed minimum interest rate?
* What is the participation rate? For how long is the
				  participation rate guaranteed?
* Is there a minimum participation rate?
* Does my contract have an interest rate cap? What is
				  it?
* Does my contract have an interest rate floor? What is
				  it?
* Is interest rate averaging used? How does it work?
* Is interest compounded during a term?
* Is there a margin, spread, or administrative fee? Is that
				  in addition to or instead of a participation rate?
* What indexing method is used in my contract?
* What are the surrender charges or penalties if I want to
				  end my contract early and take out all of my money?
* Can I get a partial withdrawal without paying charges or
				  losing interest? Does my contract have vesting? If so, what is the rate of
				  vesting?
Final Points to Consider
Remember to read your annuity contract carefully when you
				  receive it. Ask your agent or insurance company to explain anything you don't
				  understand. If you have a specific complaint or can't get answers you need from
				  the agent or company, contact your state insurance
				  department.