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Weighing the risk of an index annuity

09/20/11

Index annuities are a form of annuity that can be beneficial if the subscriber fits a certain standard, but they are largely unregulated and in many ways riskier than more traditional variable annuities, according to ABC news.

An index annuity's performance is linked to a group of stocks, while a variable annuity is tied to mutual funds. Investing in an index is riskier, but can be significantly more lucrative. Index annuities are also less regulated, and sales commissions are high. Because of this, penalties for early withdrawals of funds from an index annuity can be severe, and payout regulations may be complex and limited.

The source notes that those considering an index annuity should be conscious of a few features, including penalty-free withdrawals, which allow investors to take out an annual stipend without a penalty, and cap rates, which may limit the amount of money a person can earn regardless of the index's performance.

According to a 2008 LIMRA study, in 2007, life insurance companies put more than $70 billion worth of annuities benefits into the U.S. economy through variable, fixed, index and income based annuities packages.

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