West Virginia Code of State Rules › Agency 114 - Insurance Commission › Title 114 - LEGISLATIVE RULE INSURANCE COMMISSIONER › Series 114-11E - Annuity Disclosure › Appendix I - Equity-Indexed Annuities

Current through Register Vol. XLI, No. 28, July 12, 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&P 500), which is an equity index.
				  The value of any index varies from day to day and is not predictable. (Note: S&P
				  500 is a registered trademark of 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 tradeoffs 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
Your annuity's participation rate
in" annually and the index value is "reset" at the end of
						  each year,
may change each year and generally will be lower than that of
						  other
future decreases in the index will not affect the interest
						  you have
indexing methods. Also an annual reset design may use a cap
						  or
already earned. Therefore, your annuity using the annual
						  reset
averaging to limit the total amount of interest you might
						  earn each year.
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.
High-Water Mark
Features
Trade-Offs
Since interest is calculated using the highest value of the
						  index on a contract anniversary during the
Interest is not credited until the end of the term. In some
						  annuities, if you surrender your annuity before
term, this design may credit higher interest than some other
						  designs if
the end of the term, you may not get index-linked interest
						  for that term.
the index reaches a high point early
In other annuities, you may receive
or in the middle of the term, then drops off at the end of
						  the term.
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
Interest is not credited until the
the lowest value of the index prior to the end of the term,
						  this design
end of the term. With some annuities, if you surrender your
may credit higher interest than some other designs if the
						  index reaches a
annuity before the end of the term, you may not get
						  index-linked
low point early or in the middle of the term and then rises
						  at the end of the term.
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
Since interest is not credited until the end of the term,
						  typically six
this design may permit a higher participation rate than
						  annuities
or seven years, you may not be able to get the index-linked
						  interest
using other designs.
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&P 500 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 PRODUCER 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 producer 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 producer or
				  company, contact your state insurance department.