Indexed Annuities

MR. WATSON: So the insurance company came out with another type of annuity, called an equity indexed annuity .

1. Fixed annuities are invested in bonds & mortgages (insurance company chooses)
2. Variable annuities are invested in the stock market (policyholder chooses)
3. Equity indexed annuities are invested into the S&P 500

MR. WATSON: Equity indexed annuities are invested into the S&P 500. The S&P 500 is invested into the stock market with an average on the return of 500 stocks. Do you all agree?

ALL: Yes.

MR. WATSON: Not as risky as the variable annuity because you can never lose your principal with these.

MR. WATSON: With an equity indexed annuity, it gives you the chance of growth somewhat similar to a variable annuity by investing in the stock market but with all the guarantees of a fixed annuity. The primary purpose of equity indexed annuities is accumulation. They are not annuitized. They are only used as accumulation vehicles. In addition, it may have something called ratcheting, which means if it goes up, say from $10,000 to $12,000, we lock in all your gains. Even if the market took a nose dive right after that, we're going to use your $12,000 as a basis for all future gains. It's a crazy thing.

MR. WATSON: With an equity index annuity, it guarantees a minimum interest rate. So usually they're sold in 7-year time frames. So companies guarantee a 4-and-a-half percent interest rate, let's say. And they give you at the end of that 7 years the greater of the 4-and-a-half percent or the average of the S&P 500, whichever is greater. Does that make sense?

MR. WATSON: So it gives you all of the guarantees of a fixed annuity and somewhat market-based gains of a variable annuity. Does that make sense?

ALL: Yes.

MR. WATSON: You cannot sell anything that says "variable" until you get a securities license. Does that make sense? You need a Securities license.

WOMAN: Can we do fixed and equity index, or is equity index part of the variable?

MR. WATSON: You can sell fixed annuities or equity indexed annuities with just the state's insurance license, but to sell variable products you need a securities license.

MR. WATSON: From Day 1, I said if it's variable, it's regulated by-

WOMAN: State & Federal.

MR. WATSON: Which one is regulated by the states only?

ALL: Fixed.

MR. WATSON: Which one is regulated by the state and the SEC?

MAN: Variable.

MR. WATSON: Variable annuity. Very good. Y'all got it? If you understand that, you have a good grasp of annuities. (Keep in mind that you will have to know the name of your state regulatory body, such as Office of Insurance Regulation, Division of Insurance, etc. That will be covered in the law chapters and you will need to pay very close attention to those when you get there.)