Choosing the Right Time to Invest in an Indexed Annuity

** Author's Note: Effective October 20, 2010 SEC Rule 230.151A is withdrawn. Indexed annuities will continue to be governed by the same entities mentioned within this article. This withdrawal of SEC Rule 151A means that no change of governing entities will occur on January 12, 2011.

Let’s begin with what an annuity is. According to the Securities and Exchange Commission (SEC) an annuity is a contract between you and an insurance company, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date (U.S. Securities and Exchange Commission, 2005).

Simply put, an annuity is an investment purchased from an insurance company, generally for retirement purposes, that you either pay for up front or in installments. You then have the option to receive immediate periodic payments or receive them at a future date according to the terms of the contract. There are three basic annuity options to choose from, however, this article will only discuss the indexed annuity. The term for an indexed annuity can be a defined period such as 25 years or an undefined period such as your lifetime or the lifetime of you and your spouse.

Indexed annuity options have returns based on how well a market index such as the Standard and Poor’s 500 (S&P 500) performs. While your payout can vary, your principal remains protected even while the equity market experiences losses. This is why these are also called equity-index annuities, because they are based upon the equity market.

Currently, indexed annuities lie within a jurisdictional paradox. It is an insurance investment yet also functions as a security. Right now these are overseen by each state’s insurance department since the insurance company bears all the risk (Lambert, 2008). You can visit the National Association of Insurance Commissioners (NAIC) website to find a link to your state’s Insurance Department site. Due to the duality of indexed annuities, three agencies currently monitor them, the SEC, NAIC and the National association of Securities Dealers (NASD) and each state’s insurance department oversees them.

On December 17, 2008 the SEC issued a press release further defining that it will regulate all indexed annuity options that are issued on or after January 12, 2011. This is the result of reported unscrupulous practices by agents when issuing indexed annuity options to senior citizens. For now, all current and future indexed annuity contracts issued before January 12, 2011 will continue to be overseen by your state’s insurance department and watched by the NAIC, SEC and NASD if your insurance company is a member of the NASD.

As with any investment product, it is the dual responsibility of the consumer and broker/dealer to know how the indexed annuity works. As the consumer you need to have a base knowledge at minimum of how these annuity options work. That still is not enough. You also need to perform background and performance checks on the prospective insurance company and the broker/dealer.

Before you purchase an indexed annuity check out these annuity information sites to perform your background checks:

• Visit the NAIC’s map to link to your states insurance commissioner website to obtain license information on your issuing insurance company and their agent.
• The NASD’s investor protector page offers license, regulatory and criminal (if applicable) annuity information for your insurance company and the agent handling your annuity.

If you want to have clear cut regulations governing your indexed annuity, it is wise to wait until the SEC takes over their governance. However, if you are comfortable with the way indexed annuities are currently overseen invest before January 12, 2011. Either way, make sure your investment is an informed decision. All annuities work for you best when you as the consumer research them. Remember, the annuity will be purchased with your money, for your future, so take control of it.

Investopedia. (2008). Investopedia. Retrieved December 17, 2008, from Investopedia: www.investopedia.com

Lambert, G. D. (2008). Watch Your Back In The Annuity Game. Retrieved December 17, 2008, from Investopedia: http://www.investopedia.com/articles/pf/06/annuities.asp

National Association of Insurance Commissioners. (n.d.). National Association of Insurance Commissioners. Retrieved December 17, 2008, from National Association of Insurance Commissioners: www.naic.org

National Association of Insurance Commissioners. (1990-2008). State Insurance Department Web Sites. Retrieved December 17, 2008, from NAIC: http://www.naic.org/state_web_map.htm

North American Securities Administrators Association. (2008). Contact Your Regulator. Retrieved December 17, 2008, from NASAA: http://www.nasaa.org/QuickLinks/ContactYourRegulator.cfm

North American Securities Administrators Association. (n.d.). North American Securities Administrators Association. Retrieved December 17, 2008, from North American Securities Administrators Association: www.nasaa.org

U.S. Securities and Exchange Commission. (2005, July 19). Annuities. Retrieved December 17, 2008, from U.S. Securities and Exchange Commission: http://www.sec.gov/answers/annuity.htm

U.S. Securities and Exchange Commission. (2008, December 17). SEC Improves Protections for Seniors and Other Investors in Equity-Indexed Annuities. Retrieved December 17, 2008, from U.S. Securities and Exchange Commission: http://www.sec.gov/news/press/2008/2008-298.htm

U.S. Securities and Exchange Commission. (n.d.). U.S. Securities and Exchange Commission. Retrieved December 17, 2008, from U.S. Securities and Exchange Commission: www.sec.gov