Understanding an investment and its particular costs can protect you from creating an unsuitable choice. A good indexed annuity is a complex investment that senior citizens should thoroughly understand ahead of they buy. The SEC says the public -- especially older investors - need more awareness about how indexed annuities work and the costs and restriction involved.
Indexed annuities may be viewed as a cross of a fixed annuity - which provides a guarantee of principal and a rate that fluctuates no more than annually - and a variable annuity, whose return depends on your performance of market securities. Indexed annuities, like the traditional fixed annuity, assures the investor's principal and a minimum interest return, but may pay far more based on the performance of some market index such as the S&P 500.
But indexed annuities can be puzzling. One confusing feature is when and how the insurance company calculates the interest benefit (acknowledged interest to the indexed annuities) from an increase in the associated index. Each annuity company has a different method. Different indexed annuities use diverse indexing methods. This variety in addition to their complexity make it difficult to examine one indexed annuity to another.
Significant rise in purchases of indexed annuities in recent years has also brought grievances too. The SEC states these arise from the indexed annuities usually complex features not properly disclosed, that commissions around the products are out-sized, and that some have high surrender charges charged over long periods, which can make these particularly unsuitable for elderly people and others who may need their cash right away.
Also the government agency says that those who acquire indexed annuities are exposed to a significant investment risk because of the volatility of the underlying investments index. "Although the contract guarantees a minimum price, that's typically less than exactly what the investor gives the insurance company in the first place" said SEC Commissioner Christopher Cox
Indexed annuities have been and are considered insurance products - restricted and regulated purely by state insurance laws. But the SEC wants to regulate and manage indexed annuities. It proposed a rule that would determine indexed annuities as a security and thus place them under the supervision with the Financial Industry Regulatory Power (FINRA), a non-government regulator of securities firms. This would have created a federal uniform regulation of indexed annuities. The insurance sector was able to defeat the proposition - for now.
Now, individuals with insurance licenses can sell indexed annuities. But if the SEC proposal ever goes through, you'll also need a securities license, a lot harder to obtain, to sell indexed annuities.
However whatever the eventual outcome, investors hopefully will win whenever pressure increases to give all of them the full disclosure - and knowing - they must have on the specific benefit and costs that indexed annuities provide. In any case, before you buy an indexed annuity, ensure you understand all its features. Ask what is unclear and get a clear answer.