Pros and cons of stock option compensation
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Equity-indexed annuities have been created to provide a happy medium between the ho-hum rates of fixed products and the uncertainty of variable contract returns.
An equity-indexed annuity is a special type of fixed annuitydistinct enough to be accorded its own category. Equity-indexed annuity contracts function much like their fixed counterparts in many respects. They also provide the same exemptions from probate and creditors. But unlike regular fixed annuities, most equity-indexed contracts do not pay a set rate of interest.
Indexed annuities are by far the newest form of annuity in existence.
The pros and cons of offering employee stock options
Now there are over 40 life insurance carriers that offer indexed annuity products. Companies are also still creating new types of indexed annuities that provide various degrees of safe market participation with differing limitations. Inthe SEC moved to make indexed annuities subject to their regulation as market securities, but this attempt was hotly contested by the life insurance industry and was eventually defeated in court.
Although they are externally fairly simple products as far as the investor is concerned, the inner workings of most indexed products are fairly complex.
Most contracts work in this manner: The premium paid by the investor is taken by the annuity carrier and divided into two parts:. Savvy investors can employ this strategy on their own and reap much higher returns than what they receive in prepackaged contracts due to these caps.
Some contracts will keep the gains from one year and reset the caps each year, while others calculate gains on a cumulative basis for the term of the contract.
State law requires that indexed contracts provide investors with at least a small amount of guaranteed interest as a form of consolation if the underlying benchmark index does not rise during the term.
Equity-indexed annuity contracts are taxed in the same fashion as any other type of annuity.
All money inside these vehicles grows tax-deferred until you take distributions. The amount of premium paid into these contracts is counted as a tax-free return of principal and is included with each periodic payment on a pro-rata basis according to the exclusion ratio the ratio of principal contributed versus current contract value.
Indexed annuities should be considered by any investor who seeks higher returns than those offered by traditional guaranteed instruments, but cannot afford to risk losing principal.
However, you must be comfortable enough with absorbing the loss of any real gains if the underlying benchmark index upon which the contract is based does not perform well during the contract term. Older investors who still need some exposure to equities are prime candidates for these vehicles.
There really are no set rules as to how these should be positioned inside a retirement portfolio. Although equity-indexed annuities are certainly appropriate products for many conservative investors, there twelve sky 2 get money v. 2.0.1 a number of unscrupulous insurance agents and financial advisors who aggressively market these vehicles to uneducated senior citizens and try to get them to liquidate all of their assets and place them inside these contracts.
Although these contracts do usually have some liquidity, they should generally not be the only type of vehicle used in a retirement portfolio.
Stock market tax implications times the audience is earn money from mobile wap site pressured to move their assets into these products on the spot, without taking the time to think it through.
This practice has come under close scrutiny by both federal and state regulators and is also being closely monitored by the SEC. Equity-indexed annuities can provide valuable market exposure for conservative investors, but they can also be easily misused.
Those who can benefit from these products should be certain that they thoroughly understand all of the rules and restrictions in the contract. For further information on indexed annuities, consult your life insurance agent or trusted financial advisor.
InsuranceInvestingMoney ManagementRetirement. Mark Cussen, CFP, CMFC has 17 years of experience in the financial industry and has worked as a stock broker, financial planner, income tax preparer, insurance agent and loan officer.
He is now a full-time financial author when he is not on rotation doing financial planning for the military. He has written numerous articles for several financial websites such as Investopedia and Bankaholic, and is one of the featured authors for the Money and Personal Finance section of eHow. In his spare time, Mark enjoys surfing the net, pros and cons of stock option compensation, movies and tv, church activities and playing ultimate frisbee with friends. He is also an avid KU basketball fan and best way to make money in wow 5.3 train enthusiast, and is now taking classes to learn how to trade stocks and derivatives effectively.
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Spend More for High Quality or Buy Cheap to Save Money? Equity-Indexed Annuities Pros and Cons By Mark Cussen Posted in: Share 4 Tweet Pin Comments 1.
The Basics An equity-indexed annuity is a special type of fixed annuitydistinct enough to be accorded its own category.
Indexed Annuities and Their Short History Indexed annuities are by far the newest form of annuity in existence. Equity-Indexed Annuities at Work Although they are externally fairly simple products as far as the investor is concerned, the inner workings of most indexed products are fairly complex. The premium paid by the investor is taken by the annuity carrier and divided into two parts: The smaller portion is used to buy call options on the underlying stock index.
These call options are a type of derivative, which will increase substantially in value when the underlying index rises, exponentially more than the amount of growth in the index. This profit is then used to pass along the growth to the investors.
How Are Indexed Annuities Taxed? Payout Methods Indexed annuities offer the same payout options as any other form of annuity, including: The same as straight life, except that the payments last until both beneficiaries are dead.
Joint life payment plans are actuarially calculated based upon both life expectancies. This form of payout offers the highest periodic payment, but the insurance carrier keeps the balance of the contract if you pass away before receiving back the full value of the contract, even if you receive less than the original premium.
Life with Period Certain. Period certain options protect beneficiaries from losing contract values to the insurance company because of an early death. Joint Life with Period Certain. You and your co-beneficiary will receive a set periodic payment that ends with the later of the death of both beneficiaries or the end of that certain period of time, such as 20 years.
This plan is often used for IRA mandatory minimum distributions in qualified contracts.
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Should You Consider an Indexed Annuity? Proper Use of Indexed Annuities in Your Portfolio There really are no set rules as to how these should be positioned inside a retirement portfolio.
Equity Compensation - Pros, Cons, and Vesting Decisions
Watch Out for Scams and Fraud Although equity-indexed annuities are certainly appropriate products for many conservative investors, there are a number of unscrupulous insurance agents and financial advisors who aggressively market these vehicles to uneducated senior citizens and try to get them to liquidate all of their assets and place them inside these contracts.
Final Word Equity-indexed annuities can provide valuable market exposure for conservative investors, but they can also be easily misused. Do you have experience with indexed annuities?
Share your thoughts in the comments below. What Is an Annuity and How Does It Work? Are Annuities a Good Investment? What Is a Fixed Annuity - Definition, Pros and Cons. JoinSubscribers Sign up below to get the free Money Crashers email newsletter!
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