Equity-Indexed Annuity

30 July 2010

Equity-indexed annuities, a hybrid product, provide the potential high returns available in the stock market, the security of a guaranteed rate, as well as the option, at any time, to elect a lifetime monthly income that you cannot outlive. Since the mid-90’s, this category of products has been one of the fastest growing in the history of the industry.

Equity-indexed annuities link your interest rate 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. There are numerous formulas for determining the crediting rate for equity indexed annuities. Typically, the issuing company offers you a percentage of the index's gain, called a participation rate. For example, if the participation rate is 75 percent and the index changes by 8 percent, your interest rate will become 6.00% (8% x 75%). Participation rates and their calculation methods vary greatly. Some are downright complicated. But equity indexed annuities can provide more upside than traditional fixed deferred annuities.

Equity-indexed annuities involve little downside risk. The issuing insurance company guarantees you a minimum interest rate over the life of the contract in case the market declines. This allows you to take advantage of a rising equity market without the risk of losing your retirement savings.

Similar to variable annuities, the rate of growth on an equity-indexed annuity 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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