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Equity-Indexed Annuities

Are you considering buying an equity-indexed annuity? This brochure explains equity-indexed annuities and provides resources for obtaining additional information.

What is an equity-indexed annuity?

An equity-indexed annuity is a special type of contract between you and an insurance company. During the accumulation period – when you make either a lump sum payment or a series of payments – the insurance company credits you with a return that is based on changes in an equity index, such as the S&P 500 Composite Stock Price Index. The insurance company typically guarantees a minimum return. Guaranteed minimum return rates vary. After the accumulation period, the insurance company will make periodic payments to you under the terms of your contract, unless you choose to receive your contract value in a lump sum.

Can you lose money buying an equity-indexed annuity?

You can lose money buying an equity-indexed annuity, especially if you need to cancel your annuity early. Even with a guarantee, you can still lose money if your guarantee is based on an amount that’s less than the full amount of your purchase payments. In many cases, it will take several years for an equity-index annuity’s minimum guarantee to “break even.”

You also may have to pay a significant surrender charge and tax penalties if you cancel early. In addition, in some cases, insurance companies may not credit you with index-linked interest if you do not hold your contract to maturity.

What are some of the contract features of equity-indexed annuities?

Equity-indexed annuities are complicated products that may contain several features that can affect your return. You should fully understand how an equity-indexed annuity computes its index-linked interest rate before you buy. An insurance company may credit you with a lower return than the actual index’s gain. Some common features used to compute an equity-indexed annuity’s interest rate include:

  • Participation Rates. The participation rate determines how much of the index’s increase will be used to compute the index-linked interest rate. For example, if the participation rate is 80% and the index increases 9%, the return credited to your annuity would be 7.2% (9% x 80% = 7.2%).

  • Interest Rate Caps. Some equity-indexed annuities set a maximum rate of interest that the equity-indexed annuity can earn. If a contract has an upper limit, or cap, of 7% and the index linked to the annuity gained 7.2%, only 7% would be credited to the annuity.

  • Margin/Spread/Administrative Fee. The index-linked interest for some annuities is determined by subtracting a percentage from any gain in the index. This fee is sometimes called the “margin,” “spread,” or “administrative fee.” In the case of an annuity with a “spread” of 3%, if the index gained 9%, the return credited to the annuity would be 6% (9% - 3% = 6%).

Another feature that can have a dramatic impact on an equity-indexed annuity’s return is its indexing method (or how the amount of change in the relevant index is determined). Some common indexing methods include:

  • Annual Reset (or Ratchet). This method credits index-linked interest based on any increase in index value from the beginning to the end of the year.

  • Point-to-Point. This method credits index-linked interest based on any increase in index value from the beginning to the end of the contract’s term.

  • High Water Mark. This method credits index-linked interest based on any increase in index value from the index level at the beginning of the contract’s term to the highest index value at various points during the contract’s term, often annual anniversaries of when you purchased the annuity.

These and other features may be included in an equity-indexed annuity you are considering. Before you decide to buy an equity-indexed annuity, you should understand how each feature works and what impact, together with other features, it may have on the annuity’s potential return. 

Are equity-indexed annuities registered with the Securities and Exchange Commission?

Equity-indexed annuities combine features of traditional insurance products (guaranteed minimum return) and traditional securities (return linked to equity markets). Depending on the mix of features, an equity-indexed annuity may or may not be a security. The typical equity-indexed annuity is not registered with the SEC.

Who should I contact if I have a problem?

If you have a problem with an equity-indexed annuity, you should contact your state insurance commissioner. In addition, we would also like to hear from you, although we will likely only have jurisdiction to resolve your particular issue if your equity-indexed annuity is a security. You can send us your complaint using our online complaint form at www.sec.gov/complaint.shtml. You can also reach us by regular mail at:

Securities and Exchange Commission
Office of Investor Education and Advocacy
100 F Street, N.E. 
Washington, D.C. 20549-0213

Where can I find more information?

Before you purchase an equity-indexed annuity, you should understand how it works, what factors to consider in making your decision, and how you can avoid common problems.  An “investor alert” concerning equity-indexed annuities is available on FINRA’s website.

For more information about investing wisely and avoiding fraud, please check out the Investor Information section of our website at www.sec.gov/investor.shtml.



We have provided this information as a service to investors.  It is neither a legal interpretation nor a statement of SEC policy.  If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.

Modified: 04/17/2008