| Fixed Annuities | Equity Indexed Annuities
An equity indexed annuity is a unique annuity that offers characteristics of both a fixed and a variable annuity. This makes it possible for you to benefit from potential gains in a stock market index, while still receiving a guaranteed minimum return, based on the issuer’s ability to pay. The return offered by this hybrid varies more than a fixed annuity, but not as much as a variable annuity. It offers more risk, but potentially more return than a fixed annuity, and less risk, but potentially less return than a variable annuity. Equity indexed annuities offer a minimum guaranteed return based on the issuer’s ability to pay combined with an interest rate linked to a market index. Because of the guaranteed interest rate, equity indexed annuities have less market risk than a variable annuity, but also offer potential to earn returns better than a fixed annuity when the stock market is rising. How Equity Indexed Annuities Work Typically, an equity indexed annuity is linked to a market index such as the S&P 500 stock index (one that tracks the performance of a certain group of stocks). If the index goes up, your equity indexed annuity is credited with a return based on a percentage of the gain in that index. This gain is not paid annually, but at predetermined times during the life of the annuity. With some contracts, the waiting period may be several years and if the contract is surrendered prior to the expiration of the waiting period, only a nominal rate of growth may be credited. However if the bottom should drop out of the market, the advantage of an equity indexed annuity is that you are still entitled to a minimum interest rate on your investment as promised by the issuing insurance carrier. Remember that in years when the index loses value, your equity indexed annuity account is credited with the minimum rate your contract provides, like a fixed annuity. How to Compare It can be difficult to compare equity indexed annuities offered by various annuity companies, but here are some questions to consider as you conduct your research. How much does my equity indexed annuity earn when the market goes up? Your earnings are linked to the participation rate specified in the contract. Typically the participation rate set by the issuing insurance company ranges from 50% to 90% of the index price gain (excluding dividends and net profits a company distributes to stockholders). Is there an annual cap, or maximum amount of interest, that will be credited to my annuity? Many companies limit the amount of index gain that will be added to your equity indexed annuity account. The caps vary from company to company and vary from year to year. Additionally, some companies limit the amount the assets may grow in any given month. What rate do I earn if the market does down? If the market does down, you are still entitled to the minimum interest rate promised by the issuing insurance carrier. Some companies guarantee the rate for the annuity’s guarantee period and some are adjusted annually. How much do I lose if I surrender my annuity early? Compare the surrender fees and the different products and how long they are in effect. Most are a percentage of the assets, which decline of the first seven years and then disappear. With some contracts, the benefits of partial participation in market growth are invalidated if the investor takes partial withdrawals or surrenders, or fails to reinvest all of the annuity’s earning. Additionally, a 10% tax penalty may apply for premature surrender. The Cost of Guarantees While the return on equity indexed annuities is based on the performance of a stock market index, you do not get the full reward of the rising market, nor do you risk the full impact of a falling one. Instead, you get a percentage of the amount the index gains over a period of time, but not dividends or net profits a company distributes to stockholders. Getting Information Experts agree that equity indexed annuities are complex products, and urge you to be sure you understand how they work before you put money into them.
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