Equity Indexed Annuities

The prospect of gaining from the superior performance of the stock market is what tempts people to invest in it, but it is its volatility that dissuades them. What would be ideal is a way in which one could benefit from the increasing rates of interest in the market and yet be assured of one’s principal amount. Equity indexed annuities do just that. They are a type of fixed annuity that combines the features of fixed annuities with that of variable annuities. Equity indexed annuities offer investors a fixed rate of interest for a fixed period of time and also provide them the opportunity to see a rise in the rate of interest with the performance of a specified stock index.

How Are Equity Indexed Annuities Different From Fixed Annuities?

Fixed annuities offer the investor a fixed rate of interest for a fixed period of time, while the equity indexed annuity offers the investor a chance at getting a higher rate of return as it is valued according to the performance of a specified stock index. There are various methods used by insurance companies to calculate the index-linked returns form the equity-indexed annuity.

Point-to-point credits wherein the index value at the beginning and end of a year is taken into account when calculating the returns, only change in price is measured and not dividends.
High water mark refers to the highest value during a contract period and this is calculated by studying the annual contact anniversary index values.
The averaging method averages the performance of the index over a certain period of time
The insurance company may do an annual reset of the rate of interest.
A limit on the indexed interest to an equity-indexed annuity is referred to as a cap.
Participation rate or increase in percent participation in the market is also used to calculate the indexed interest for the investor.

Advantages of Equity Indexed Annuities:

Investment in equity indexed annuities allow the investor to get a good rate of interest on his investment when the stock index is doing well and yet when it does poorly the investor does not suffer as the minimum rate of interest is fixed.
The investment is secure, as the value of the annuity will not fall below a determined point.
The investor benefits from the highs of the stock market without bearing the brunt of the falls in the rate of interest or the stock index. Thus the risk remains low while the prospect of profits is high.
Equity indexed annuities provide a higher rate of interest than CDs and bond mutual funds.

The equity-indexed annuity is a great investment option as it offers you a basic rate of return whilst protecting the principal amount and also provides you the benefits from a good stock index performance. It is recommended that the equity-indexed annuity that you select use a point to point, point to point with annual reset or the high-water mark to calculate indexed interest.

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