Fixed-indexed annuities -- also called equity-indexed annuities -- are contracts between an insurance company and an investor in which the insurance company agrees to extend payments to the investor. Due to special regulation of these annuities, consumers must do due diligence to ensure they are a safe investment. An important consideration is the commission paid on a fixed-indexed annuity.
Fixed-Indexed Annuity Definition
Fixed-indexed annuities combine some aspects of variable annuities and some aspects of fixed annuities. Investors encounter greater potential return and greater risk than with a fixed annuity but less potential return and risk than with a variable annuity. A fixed-indexed annuity links interest rates to a market index (usually the Standard & Poors 500) with a minimum guaranteed interest rate. Equity-indexed annuities calculate changes in the index to credit interest to investors.
Although fixed-indexed annuities are an insurance product, insurance companies market them as investments -- often aimed at seniors. For this reason, the Securities and Exchange Commission does not regulate the structure and sales of these contracts. Instead, individual state insurance commissioners regulate fixed-indexed annuities.
The insurance agencies issuing fixed-indexed annuities pay commissions to the agents who sell them to investors. The commissions tend to be high for agents selling fixed-indexed annuities. These elevated commissions make them more attractive to agents, especially when comparing them to lower commissions for variable annuities. According to Chris Lloyd of the FinancialCounsel website, average commissions stand at 10.4 percent, with 80 percent of fixed-indexed annuity sales garnering commissions at 9 percent or higher. Furthermore, according to the AnnuityIQ website, agents often earn commissions for fixed-indexed annuities that are approximately twice as large as those earned from selling traditional fixed annuities.
Conflict of Interest
Issues may arise when brokers or agents choose to push fixed-indexed annuities on investors instead of other annuities because of the higher commissions. The design of these annuities does not make them advantageous to all investors. Agents may prioritize their own income by recommending fixed-indexed annuities instead of recommending other shorter and less-complex investments that could be more appropriate -- and less expensive -- for the investor. In contrast to agents or brokers, financial advisers who assist investors generally earn management fees rather than commissions. This can remove the propensity for conflict of interest.
Investors who consider the purchase of a fixed-indexed annuity should research and evaluate the products carefully. Read the contract carefully, make sure you understand it and ask questions about ambiguous items. Specifically, note the participation rates for the market index gain and whether the annuity involves spread/margin/asset fees outside of participation rates. Also inquire about rules for withdrawing funds and interest rate caps. In addition, ask specific questions about agent commissions and research the insurance company carefully to ensure that the company is financially strong. Finally, read the contract carefully to learn about clauses that allow the insurance company to change features annually or with contract renewals.
- Financial Industry Regulatory Authority, Inc.: Equity-Indexed Annuities—A Complex Choice
- Financial Counsel: The Pros and Cons of Equity Indexed Annuities
- USAToday: Sometimes, Equity-Indexed Annuities Are OK; Sometimes
- AnnuityIQ: Equity Indexed Annuities
- Guarding Your Wealth: Equity Indexed Annuities: The Next Big Scandal
- Guarding Your Wealth: Equity Indexed Annuities: Agents Prey On Unsuspecting