by John Darer CLU ChFC MSSC CeFT RSP CLTC
There is a critical distinction between an index-linked structured settlement and the equity-indexed annuities being sold for retirement.
What is an equity indexed annuity?
An equity-indexed annuity is an accumulation vehicle. An equity indexed annuity is a form of deferred annuity that is different from other fixed annuities because of the way it credits interest to your annuity's value. Most fixed annuities only credit interest calculated at a rate set in the contract. Equity-indexed annuities credit interest using a formula based on changes in the index to which the annuity is linked. The formula decides how the additional interest, if any, is calculated and credited. How much additional interest you get and when.
Equity Indexed Annuities are available in many different "shapes and flavors". The complexity of choices caused the Financial Services Regulatory Authority (FINRA) to issue an alert on equity-index-annuities. FINRA states in part [ full alert can be found by clicking on the alert link in the preceding sentence] "Although one insurance company at one time included the word "simple" in the name of its product, EIAs are anything but easy to understand. One of the most confusing features of an EIA is the method used to calculate the gain in the index to which the annuity is linked. To make matters worse, there is not one, but several different indexing methods. Because of the variety and complexity of the methods used to credit interest, investors will find it difficult to compare one EIA to another".
What is an indexed-linked structured settlement?
An index-linked structured settlement provides periodic payments that are adjusted annually based on changes in the S&P 500 between two annual measuring points. While there are many companies offering equity -indexed annuities, at the time of posting, Pacific LIfe is the only annuity issuer offering an index-linked structured settlement payment option,through its apppointed structured settlement agents, of which I am one. The participation in changes in the S&P 500 is capped at 5% and payments do not adjust downwards if there are negative changes in the S&P 500. Pacific Life underwrites through two annuity issuers, Pacific Life Insurance Company (in all states but New York) and Pacific Life and Annuity, in New York.
Critical Differences between Index-Linked Structured Settlements ( ILSS) and Equity Indexed Annuities (EIA)
- Indexing of Payments ( ILSS) vs Indexing of Account Value (EIA)
- Formula for adjusting payments vs formula for crediting interest (EIA)
- Indexing applies only after payments begin (ILSS).
- Annuity Rider ( ILSS) vs an Annuity Policy (EIA)
- S&P 500 is the only index measured (ILSS) vs possbility of other choices depending on annuity issuer(EIA)
- Offered by one life insurance company vs many life insurance companies (ILSS)
- No withdrawals allowed (ILSS),because you are agreeing to an income stream vs. withdrawals allowed(EIA- subject to surrender fees per contract)
- If used to pay damages on account of physical injury, physical sickness, wrongful death, or workers compensation [subect to workers comp board approval] and satisfies the requirements of the applicable sub-sections of IRC 104, payments are income-tax free (ILSS) vs tax deferred (EIA, or ILSS-for structured attorney fees)
For more information on indexed linked structured settlement payments contact John Darer at 203-325-8640
Disclaimer: The information presented in this post should not be used in any actual transaction without the advice and guidance of a professional tax and financial adviser who is familiar with all the relevant facts. Although the information contained here is presented in good faith and believed to be correct, it is general in nature and is not intended as tax advice. Furthermore, the information contained herein may not be applicable to or suitable for the individuals' specific circumstances or needs and may require consideration of other matters..