Stock-indexed annuities are a great option for conservative investors who can’t stomach a crash or bear market, according to economist and writer Mark Skousen, Presidential Fellow at the George L. Argyros School of Business and Economics at Chapman University. Skousen writes on StockInvestor.com that stock-indexed annuities are a great product offered by major insurance companies.
In Skousen’s March 26, 2020 article, he says his wife bought stock-index annuities right before the 2008 financial crisis and has more than doubled her money. He adds that she won’t lose any money this year.
Skousen included a chart showing an indexed annuity linked to the S&P 500 with a 40% participation rate. Starting in 2001, he says it performed almost as well as the S&P 500 total return index (including dividends) through this year. Skousen says that both would have more than doubled an investor’s money, with a compounded annualized return of 4.6% for the S&P 500 (including dividends) and 3.9% for the indexed annuity (a 40% participation rate).
Stock-indexed annuities are issued by insurance companies. They guarantee your principal is intact every year, and offer a 0% no loss protection floor in the bad years. If the market drops significantly, you lose nothing. From 2000 to 2020, there were three major bear markets and owners of the stock-indexed annuities avoided all three.
Skousen adds that a stock-indexed annuity has an additional tax benefit. You don’t have to pay taxes until you take your money out.
There is one catch, according to Skousen. In most cases, the contract limits your upside when stocks go up. Some insurers offer a 50% participation rate on the upside. For example, if the S&P 500 rises 30%, an investor would profit by 15%.
Skousen adds that insurance companies are able to offer this guarantee without losing money by hedging their positions – for example, purchasing 70-80% in high-grade bonds and government securities and investing the remaining 20-30% in stock-index call options.
Finally, Skousen addresses risk. He says you want to make sure you buy an indexed annuity with an insurance company that will stay in business, as indexed annuities are not insured by the government. He says the key is to stay with top-rated insurance companies that are rated A or better by A. M. Best. You can read Skousen’s full article here.
Contact Farris Financial
If you’re an investor in Northwest Arkansas and are interested in the benefits of Indexed Annuities, contact Jason Keeling at Farris Financial. Jason can provide high-quality assistance with all your specialized financial services needs.