RT Journal Article
SR Electronic
T1 A Return-Risk Evaluation of an Indexed Annuity Investment
JF The Journal of Wealth Management
FD Institutional Investor Journals
SP 43
OP 50
DO 10.3905/jwm.2005.470613
VO 7
IS 4
A1 W. Cris Lewis
YR 2005
UL https://pm-research.com/content/7/4/43.abstract
AB This article focuses on a relatively new investment option, an indexed annuity account offered by at least one insurance company, which combines U.S. Treasury bonds with options on the S&P 500 Index that guarantees a minimum return of 2.7% per year and a maximum return (or cap return) equal to the 52-week percentage change in the S&P 500 Index following the date of purchase but no more than a return set by management which has been 8% or 9% in the past two years. (Contractually, the cap return cannot be less than 5% per year.) Using simulated investment results for 10-, 20-, and 30-year holding periods using actual rate-of-return data for the period 1946-2003, the author demonstrates that a hypothetical index annuity account does provide a relatively low-risk investment, although the cost, in terms of forgone returns on a pure equity investment, is relatively high. When the cap return was set at 9%, the index annuity account generally achieved higher returns and lower risk than did a long-term U.S. government bond investment.