Equity-Indexed Annuity

15 May 2008

Equity-indexed annuities, a hybrid product, provide the potential high returns available in the stock market, the security of a guaranteed rate, and an income for life.

Equity-indexed annuities link your premium to a stock or equity index. Indices, such as the Standard and Poor's 500, measure the market's performance.

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Are you willing to take more risk for higher returns? Check out the
variable deferred annuity.

Or, do you prefer Security, with no risk? Consider the fixed annuity.

Life insurance companies determine your rate of return based on changes in the index. The issuing company offers you a percentage of the index's gain, called a participation rate. For example, if the participation rate is 85 percent and the index changes by 7 percent, your interest rate will become 5.95% (7% x 85%). Participation rates and their calculation methods vary greatly, but most companies offer a rate between 70 and 90 percent. The insurance company guarantees the participation rate for a specified time period, after which a new rate is issued.

Equity-indexed annuities involve little risk. Insurance companies guarantee you a minimum interest rate, sometimes as high as 3 percent, in case the market declines. This allows you to take advantage of a booming market without the risk of losing your retirement savings.

Similar to variable annuities, the amount of equity-indexed annuity payouts is not predictable. However, you are guaranteed a minimum interest rate so you can find comfort in knowing that your payouts will always be equal to or higher than the minimum rate of return.

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