Equity Indexed Annuity

The Fixed index annuity or also referred to as equity indexed annuity is a hybrid annuity that allows for the possibility for upside appreciation in the stock market, but protects against risk of loss to principal due to unexpected market changes. An equity indexed annuity also guarantees a minimum interest rate regardless of future performance.  Each insurance company uses a different formula to calculate the rate guarantees they offer to investors.

Are they a good deal?  Our post on Equity Indexed Annuities opens up more on the topic and injects a bit more opinion than this informational page- please check it out.

The equity indexed annuity is a hybrid that attempts to balance the safety of a fixed income product with the potential for gains of a variable product.  These annuities link account performance to a stock market index.  Every company measures different indexes differently, and calculates returns differently.

While historically it’s true that the stock market offers the potential for higher returns, that upside always comes with potential risk. For conservative investments, fixed interest products prioritize safety and protection of principal, but that comes at the price of lower returns.  But over the long term, these returns often balance out, especially when volatility can wipe out years of gains. Hello 2008?  Be sure to understand how by reading Which 10% do you want…

Investors constantly wrestle these forces of security and yield in every individual investment and in each portfolio allocation decision.

The equity indexed annuity (fixed indexed annuity) attempts to satisfy all forces, and provide a middle ground where performance meets safety and investors can experience the best of both worlds.  You might guess what happens when one product tries to be all things to all people.

The equity indexed annuity can track a preferred stock market index, such as the S&P 500, NASDAQ, or Dow, with the rate of return usually being a set percentage of the increase the index shows over a set period, or a guaranteed minimum interest rate (whichever is higher).

Equity indexed annuities are a very attractive annuity for many investors because the principal investment is protected and guaranteed from loss, while the potential for gains engenders hope.  But be wary of the details!

Each Equity indexed annuity offers different components and characteristics.  Insurance companies vary:

• The minimum amount you are guaranteed to earn,
• The maximum amount you can earn,
• The total percentage of upward movement in an Index that you can participate in,
• The use of your accumulated funds once the annuity term is over.

For any equity indexed annuity, it is important to clearly understand how the annuity works, to ensure your selection is best suited to meet your future retirement needs.  Be sure to read through our Report for the Straight Talk on picking any annuity product.