Index Annuity Performance - 1998

The S&P 500 began 1998 with a value of 970.43, rose 22.3% to a value of 1186.75 by July 17, then plunged over the next six weeks to close at 957.28 on August 31 - erasing all gains for the year.  Over the next couple of months the index did a great impersonation of a bear rally, before deciding that the bull was not dead and ending the year at 1229.23

While the index posted its fourth consecutive year of gains, it was a rocky road.  However, when the marked is choppy averaging of index values protects against locking in returns at the lowest point.  If you look at the one year period ending August 31 many mutual funds had lost money, but averaging monthly index values produces a 14% gain for the same period.

The following is the calendar year 1998 performance of specific investment categories and the S&P 500 performance calculated using a monthly average of index values:
 

Monthly averaging of index values resulted in a gain that was more than double the return on the typical certificate of deposit, one and a half times greater than bond mutual funds, and only 2% lower than the average mutual fund, even though the mutual fund performance reflects reinvested dividends and the monthly averaged index does not.

A year ending September 30th included the worst stock market quarter in eight years.  Monthly averaging of index values produced a 9% gain - almost double that of CD's, while the typical mutual fund was reporting losses.  For the calendar year, averaging of index values resulted in a gain that was only slightly less than the average mutual fund and more than double that of CD's.

Index Annuities Are Not Mutual Funds
Mutual fund returns subject the principal to market risk; a mutual fund gain is only realized when the fund is sold.  Equity index annuities are fixed annuities with the crediting of excess interest based on movements of an equity index.  Annual reset index annuity structures lock in the gains each year.  If the Bear shows up this year a fund could lose all of last year's gains; an annual reset index annuity preserves annual gains which are unaffected by future market downturns.

A key feature of an annual reset annuity is that it does just that - it resets its beginning level each year.  If the index declines this year the annual reset index structure would record a year of zero growth.  But, next year's calculation for recording movement would begin at the lower index level.

But Rates Are Lower Today
A combination of lower bond yields and higher option prices have lowered index annuity participation rates from where they were a year ago.  However, even at a 45% participation rate a monthly averaged index structure last year would have produced a higher return than certificates of deposit.  Today, CD rates are around 4.25%  It doesn't take much of an increase in the index - even at lower participation rates, for an index annuity to beat the returns on CD's.

Long Term Savings Vehicles
Index annuities were designed to provide the potential for higher returns than other traditional savings instruments, like certificates of deposit and other fixed annuities - and they've succeeded very well.  They were never intended to be a replacement for mutual funds.  If a customer wants the highest possible return regardless of market risk, they should buy a mutual fund.  If a customer wants higher return potential from a long term savings vehicle without market risk to principal, they should consider an index annuity.

Intro to EIAs
S&P 500 Index
Benefits of the S&P
Advantage 500 Prospects
Gain without Pain
Extended Forecast
Sample Calculation
Selling Points
Best & Worst
Annuity Performance
Why EIAs are Popular

Source: Index Compendium, Volume 2, Number 1.