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How Can Your HOA Benefit from an Indexed Annuity?

08/01/2020 4:21 PM | CAI Rocky Mountain Chapter (Administrator)

By C. David Stansfield, Farmers Insurance

As a 25-year Insurance Agent and multiple year member of the Million Dollar Round Table (top 1% of financial insurance agents), I have met with many business owners and clients to explain the pros and cons of Indexed Annuities.   I recently learned of an HOA that deposited a large sum of their cash reserve account into an Indexed Annuity and realized, this might be the best time for HOAs to consider this opportunity.  Interest rates are at an all-time low, the stock market is at an all-time high, and reasonable rate of return, with limited or no risk, is always appreciated.  This prompted me to explain why certain Indexed Annuities can be a good option for an HOA reserve account.   

Let us start with the definition of an Indexed Annuity.   According to Wikipedia, “An indexed annuity in the United States is a type of tax-deferred annuity whose credited interest is linked to an equity index—typically the S&P 500 or international index. It guarantees a minimum interest rate (typically between 1% and 3%) if held to the end of the surrender term and protects against a loss of principal.”  

There are two types of Indexed Annuities:  Income Annuities and Accumulation Annuities.  

  • Income Annuities allow someone to invest a fixed amount of money and take immediate income OR wait a specified amount of time to begin taking income (single income or joint income options exist).  This type of annuity is not recommended for an HOA due to the lack of liquidity, surrender charges, and it is designed to payout income for life.  
  • Accumulation Annuities allow individuals and an HOA to invest a fixed amount of money, have a guarantee of no loss of principle, and provide a choice of different indexes to invest in. The S&P 500 Index or Balanced Index are common indexes used in Accumulation Annuities.  This is an opportunity to participate in an Index increase, but not experience decreases in index value.  Many accumulation annuities have multiple index choices, as well as a guaranteed fixed account.  Even with the low interest rates we are experiencing, fixed rates of 2% are still available.  This is still significantly higher than the rate of a Certificate of Deposit (CD).  

Based on the explanation above, I recommend Accumulation Annuities for HOAs versus a Certificate of Deposit (CD).  Below is a comparison of a five-year Accumulation Annuity and a typical CD:

Accumulation Annuity

Certificate of Deposit

  • Minimum 10% interest of premium after five years.
  • Varies year to year; current average rate is 0.37% /year.1
  • Multiple Index Strategies and investment options available to investors; higher upside with no risk of loss and investment flexibility. 
  • N/A
  • Return of Premium Benefit - full return of original investment amount; no early termination fee 
  • Loss of accumulated principal interest and early termination fees apply; varies by bank 
  • 10% annual withdrawal option with no fee
  • N/A
  • Guaranteed 2% premium interest option
  • N/A

Indexed Annuity investors are provided a level of investment protection known as the State Guarantee Fund.  Each state, as well as the District of Columbia and Puerto Rico, has a guaranty association, and every insurance company must belong to the guaranty association in the state where they operate.


When researching potential Indexed Annuity products and providers, it is a good idea to investigate the ratings of the issuing insurance company before making an annuity purchase.  Resources to check the ratings of insurance companies are: AM Best, Fitch, Moody’s and Standard and Poor’s.  If you plan on purchasing annuities worth more than your state guaranty association limits, you may want to purchase multiple annuities from different companies, without exceeding the guaranty limits on a single annuity.2


C. David Stansfield, LUTCF has been an insurance agent for 25 years and is a multiple year member of the Million Dollar Round Table, which encompasses the top 1% of financial insurance agents. If you have more questions about Indexed Annuities and how they can benefit you or your HOA, feel free to reach out to me at dstansfield@farmersagent.com.


References:

  1. “Current CD Rates- July 2020”, Golderberg, M.; July 16, 2020, MSN; https://www.msn.com/en-us/money/personalfinance/current-cd-rates-july-2020/ar-BBHwnKx
  2. “State Guarantee Associations”, Silvestrini, E., Annuity.Org; https://www.annuity.org/annuities/regulations/state-guaranty-associations/

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