An annuity is a long-term, interest-paying contract offered through an insurance company or financial institution. An equity indexed annuity is an annuity that earns interest that is linked to a stock or other equity index. Depending on how those stocks fare will determine what you gain. The equity index annuities, as in any kind of investments, have to be kept untouched for a long period. The typical time is a minimum of 7 years. This will ensure that you get the full benefit of having invested in an equity index annuity.
The equity index annuities are basically an option of investment that is offered by insurance companies. They actually provide you with the benefit of investing in the stock market without the associated risks of losing your money. So, in an equity index annuity, your principal is never lost and even in a worst case you may take some interest back home. The flip side of this however is that even if the stocks that the equity index annuity is invested in gives high returns, you will not receive the full returns but just a percentage. So you do not get the maximum returns for your equity index annuity but just a part.
This is however the compensation that the insurance companies who offer you the equity index annuities receive, for providing you with a safety net throughout the term of the annuity. The percentage of returns (i.e. the gain of the index) that your equity index annuity brings you is determined by the participation rate. This rate is pre-decided and varies and to know this you have to read the fine print prior to signing on the documents. The general participation rate offered for most equity index annuities is between 70 to 90 percent.
The equity index annuities are therefore seen as a conservative and prudent investment.
They became quite popular during the previous bullish run in the market and insurance companies saw them as an excellent means of combining the security of a guaranteed return with the boom of the stock market. All equity index annuities offer a minimum interest rate and its value also does not fall below the guaranteed minimum percentage of the premium paid i.e. 90 percent at least.
However to achieve maximum benefits, your equity index annuities should not be withdrawn before the term. If you do even a partial withdrawal it will definitely affect the interest you receive. Like all investments, this is best kept for a long term. This will also help your equity index annuities even out and recover if the index plunges. As we know the stock market is volatile and this needs to be kept in mind when investing. Also there are definite withdrawal penalties that you would have to pay as well.
How then do the insurance agencies benefit from offering equity index annuities? The insurance companies reinvest the premium amounts that you pay and this is usually invested into bonds. Since the participation rate is fixed, they have to pay only those set rates of interest to the investors of the equity index annuities and the insurance companies profit the balance.
Equity index annuities are generally affiliated to a particular stock market index such as the S&P 500 or the Dow Jones Industrial Average. However as the equity index annuities combine features of a typical insurance product with the traditional security they do completely fall into each of those specific categories.
As a typical insurance product you are guaranteed minimum return and in terms of securities your investment is linked to the equity market. However it all depends on the features that your equity index annuity provides and it may or may not be a security. The typical equity-indexed annuity is not registered with the SEC.
So then how does one know which equity index annuity is best for oneself? The only way is to find out as much as you can about the equity index annuity before you decide.
Ask a lot of questions like which stock market index does the equity index annuity use? What participation rate is being offered to you? Are there any hidden charges in terms of any fees or deductions payable? You have to run through a number of equity index annuity offerings before making your decision.
So save for a rainy day and do it the equity index annuity way!About the Author:
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