There are many factors that should be considered before investing in an annuity. Some of these include:
1. Surrender Fees: Like fixed deferred annuities, equity-indexed annuities have penalties for early withdrawal called surrender charges. These charges can result in a loss of your principal investment. These charges typically decline over the length of the surrender charge period (typically five to 15 years depending on the company)
2. Tax Consequences: These annuities are also suited for investors with long-term investment horizons. Withdrawals from these annuities can also subject the annuity owner to income taxes, and prior to age 59 1/2, an additional 10% income tax penalty on the distributed amount.
3. Features Vary Among Insurance Companies: There are many companies that are offering these types of annuities, and the methods of calculating the minimum and maximum interest rate vary greatly among them. Although many companies offer a minimum interest rate (typically ranging between 1/5 to 3%), some companies offer minimum interest rates as low oas 0%.
4. Fees and Expenses: Asset management fees will be incurred on these annuities. Maintenance feels, sales commissions, trading costs and other contract charges could also apply. These charges will, in many cases reduce the account value of these annuities.
5. Loans and Early Withdrawals: Although some companies do allow you to ake minimal withdrawals with surrender charges, it is important to remember that some withdrawals can affect the amount of market downside protection provided under the contract.
6. Company Stability and Regulatory Oversight: All annuity features are guaranteed by the claims-paying ability of the issuing company. The guaranteed account value of an equity-index annuity applies only if the annuity is held until the end of the contract term, and that loss of principal is possible if the annuity is surrendered before the end of the contract. Despite the market participation feature, the various state insurance departments regulate these products.