Annuity Considerations

• Tax rules allow earnings in an annuity to grow tax-deferred until payments or withdrawals are made during retirement. Annuities are used as supplemental retirement saving for lump sum amounts that will not be needed until retirement and the annuity owner does not want to pay taxes on the earnings. Indexed annuities have the amount of interest credit based on gains in a stock market index such as the S&P 500 stock index. An indexed annuity will not go down in value if the stock market index suffers a decline.
  
  

Return Calculations

• Indexed annuities are complicated products, primarily in the function of interest calculations. Each annuity issuer has its own indexing and calculation method. The interest calculation will be spelled out in the contract. Important items to discover are the portion of the market return that is credited to the account value and the time frame for calculating the index return. Some indexed annuities use the monthly stock market changes, some use annual values and others use the market return over a period of years. Another item to look for in the annuity contract is whether the insurance company can change the criteria for interest calculations in the future.
  
  

Fees and Restrictions

• Indexed annuities do not have upfront fees or commissions. The contracts have withdrawal penalties that are usually a decreasing percentage over a period of years. Indexed annuity withdrawal fees can start at 10 percent or more and stretch for a period of 10 to 15 years. Withdrawals made before age 59 1/2 may also be subject to a 10 percent tax penalty on any earnings. An investor considering an index annuity should view it as a long-term investment and understand all of the terms before paying money for a indexed annuity contract.
  
  

Safety of Indexed Annuities

• Indexed annuities are backed by the issuing insurance company. There are no government guarantee programs protecting annuity assets. The Financial Industry Regulatory Authority -- FINRA -- notes that the guarantee on many indexed annuities is just 90 percent of the amount invested plus the guaranteed minimum interest rate in the contract. FINRA also reports that some indexed annuity contracts will not credit the interest earned if a contract is surrendered early. Indexed annuities can be sold by insurance agents without a securities license. Annuity buyers should be satisfied the agent understands the contract and explains all of the details before an indexed annuity is purchased.