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Equity-Indexed Annuities

Equity-indexed annuity products are sold by insurance agents, frequently by those who do not possess a securities license, but want to offer clients the ability to invest in a financial product that provides tax deferred growth that is somehow tied to the stock market. The sales pitch emphasizes the upside of the stock market for investors without the downside. Index annuity products offer a guaranteed minimum rate of return if the index annuity is held for the life of the contract, with many contract periods between 8-15 years. Remember the “sales pitch” axiom, “if it sounds too good to be true, it probably isn’t” when you weigh investments decisions related to equity-indexed annuities because many investors don’t appreciate the fact that insurance company charges substantial fees from the contract to pay for this “downside protection.”

Equity-indexed are different than fixed and market value adjusted annuity contracts because the interest rate credited to the account balance is linked to a stock market index or basket of stock indexes. The methods of calculating the linkage between the index and interest rate credited to the annuity contract is determined by many factors including:

  • indexing method (annual reset, point to point, high water);
  • participation rate (current or guaranteed);
  • interest rate cap (current or guaranteed); and
  • minimum guaranteed rate.

Retired and elderly investors have been the target of insurance agents who sell equity-indexed annuities because senior citizens usually seek retirement income and are risk adverse. The Financial Industry Regulatory Authority (FINRA) Investor Alert, Equity-Indexed Annuities: A Complex Choice recognizes the potential for elder financial fraud and cautions investors to understand the complex nature of equity-indexed annuity products. According to FINRA, questions investors should ask include:

  • What is the guaranteed minimum return?
  • How good is the guarantee?
  • What is a market index?
  • Can I get my money when I want?
  • Is it possible to lose money in an equity-indexed annuity?

Answers to these questions and other details concerning what regulators considered to be a “complex” product are often minimized or not disclosed which can represent fraudulent misrepresentation or omission of material facts when the motive may be due to conflicts of interest when the agent’s compensation is taken into consideration. The commissions paid for the sale of some equity-indexed annuity products can range between 8% – 12% of the premium payment. The higher the commission paid, the higher the commission and consequently the longer the surrender period for equity-indexed annuities. These significant surrender charges with extended surrender charge periods is an important reason why many consider recommendations that retired and elderly investor invest in these annuities above certain ages should be unsuitable investment advice because the surrender periods extend beyond their life expectancies. Insurance companies market these products because they are very profitable for the insurance company producing huge profits during years of market increases.

Our team of lawyers can help you determine whether you suffered economic losses from investments in index annuities that are the result of violations of state insurance or securities industry rules and regulations. If an investor suffers losses in index annuities as a result of violations of state insurance or securities industry rules and regulations they may be able recover their losses through a civil court or FINRA arbitration claim.

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