If you're a conservative saver who's unhappy with the rate on your bank CDs, the insurance industry has a hot new product designed exactly for people like you.
It's called an equity indexed annuity. It combines the safety of a traditional fixed annuity with a stock market kicker.
But the indexed annuities on sale today can be complicated, says annuity expert Timothy Pfeifer of the consulting firm Milliman & Robertson in Chicago. It's easy to think you understand them when in fact you don't.
A traditional fixed annuity pays a guaranteed tax-deferred rate of interest for anywhere from one to 10 years. When the guarantee expires, the rate will change.
Typically, you get a new rate every year. The current one-year fixed-annuity rate is around 6 to 6.5 percent.
If you don't like that rate, you could choose a variable annuity, which lets you invest in stocks or bonds. But if they decline in price, so will the value of your principal. Over the long term, stocks should earn more than 6.5 percent, but conservative savers hate to see losses, anytime, ever.
That's where the indexed annuity comes in. It promises that you'll always get a guaranteed minimum return. But instead of paying fixed interest rates, it links your investment to market performance often to price changes in Standard & Poor's 500 stock index, excluding dividends.
Every indexed annuity on the market has its own special wrinkle, making them all but impossible to compare. But here are the things to ask about:
(1) What is the annuity's term? Generally, you commit to holding for five to 10 years. The shorter the term, the greater the risk that the stock market won't perform well over your holding period.
(2) What do you earn when the market goes up? You're credited with anywhere from 60 to 100 percent of the price gain (excluding dividends). Some annuities can change that percentage from year to year, so you're never sure how much you'll get. "You lose a lot when your credited gains don't include dividends," says fee-only life insurance adviser Peter Katt of Mattawan, Mich.
(3) At the end of the term, how does the insurer figure your gain? Some use the market price on the day the annuity matures. Some look at each policy anniversary date and pick the highest one. Some credit a portion of each year's market gains, if any. Some average the gains. Some give you 100 percent of the gain but deduct 1 percent for expenses. There's no way of knowing in advance which type of annuity will pay the most.
(4) Are there caps? Some annuities limit how much you can earn in a single year. For example, if stocks go up 20 percent you might get only 14 percent. The insurer might also change the cap from year to year.
(5) What if stock prices drop? You'll be credited with zero that year and sometimes a loss, if you surrender early. If stock prices rise the following year but remain below the previous peak, some annuities credit you with a gain while others don't.
(6) What if you want to quit the annuity early? Some pay you only the guaranteed minimum return. Some credit you with all or part of your earnings to date but impose a surrender fee. Sometimes you take a loss.
(7) What if everything crashes? Your indexed annuity carries a minimum guarantee, if you hold for the full term. It's typically quoted as "3 percent," but 3 percent of what?
At GE Capital Assurance in Seattle, it's 3 percent of 90 percent of your original capital. On a 10-year investment, that works out to 1.9 percent, says marketing vice president John Howard.
Others offer 3 percent of 80 percent of your capital. Unity Mutual Life in Syracuse, N.Y., pays a straight 3 percent.
Fee-only life insurance adviser Glenn Daily of New York thinks you should look at alternatives. Instead of an indexed annuity, he says, consider putting 70 percent of your money in a traditional fixed annuity and 30 percent in a variable annuity invested in stocks.
Daily compared this investment with three different indexed annuities, using 5,000 randomly generated market scenarios over a five-year period. The combination of fixed and variable annuities yielded a higher value more than half the time. The combo also provided better protection when stocks did their worst.
You can't predict how these new annuities will behave. They need to be a better value before consumers jump.
Congress is readying a present for the owners of America's 66.5 million homes. There's wide bipartisan support for a bill that would wipe out taxes on your profits when you sell. Your home would become the equivalent of a tax-free municipal bond.
It's the perfect political party gift. President Clinton proposed its current version, so the Democrats helped. Bob Dole offered something similar, so the Republicans helped. And in Washington money, it doesn't even cost very much an estimated $1.4 billion over six years.
What kind of bill might pass is anybody's guess. At present, it eliminates taxes on gains up to $500,000 for couples and $250,000 for singles, when they sell their primary home.
Not many houses do better than that. The Office of Management and Budget believes this exemption would cover 99 percent of all sales.
The current tax on gains has had only a minor effect on housing decisions, so eliminating it shouldn't affect home prices very much, says Orawin Velz, research director for the National Association of Realtors in Washington, D.C.
The price of expensive houses ($250,000 and up) might drop somewhat, as more older people sell big family homes and buy something smaller.
What's more, people moving from high-cost areas like California wouldn't feel forced to roll their profits into the most expensive house in Texas or Michigan, just to defer the tax.
But increased demand would probably raise the value of homes in the mid-price range. As the years go by, mid-priced homes in the South and Southwest should do especially well, as the growing senior population checks out of the snow and into the sun.
As currently planned, the bill would end taxes on most home sales made from May 7 on. That date is supposed to be graven in stone (at least that's what they say).
Don't act on this information yet. You can't depend on bills until they're actually passed.
Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.
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