An indexed annuity is a special class of annuity which is tied to a market index, usually Standard & Poor’s 500. Standard & Poor’s 500 measures the 500 largest companies over a broad market. Because it is broad and large, the S&P indexed annuity spreads the risk of a loss over all market sectors. The premium paid for an indexed annuity is put in an index fund. The returns are then based on the performance of the entire index. While stocks in one category may increase, stocks in another category may decrease, so an investor should always be prepared to take a loss when investing in an indexed annuity.
Insurance agents like to sell indexed annuities because the commissions they receive from insurers are high, as much as 12% or more of the invested amount. However, due to a recent conviction of an agent in California, insurance agents across the country are becoming leery of offering indexed annuities as an option to investors, especially elderly investors, who may not understand how investing in an indexed annuity works or the high fees that are associated with the annuity, particularly if money is withdrawn early.
In the California case, one elderly investor paid $14,000, or an 8% commission. If the money had been withdrawn within the first year of ownership, there would have been a penalty equal to12.5% of the principal. Although the agent claimed that the investor was capable and knew the risks, the court filings show otherwise and the agent was convicted of felony-theft for selling an annuity to an elderly person, who did not understand the complexities of the annuity.
If you or someone you know has purchased an indexed annuity and were not informed of the complexities of the annuity, please contact us to discuss your legal options.