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Equity Indexed Annuity

Equity Indexed Annuity

An equity indexed annuity is one of the most accepted insurance products in the present times. The key selling point of equity indexed annuities is it ensures guaranteed returns; however, the profit is limited.

The Way Equity Indexed Annuity Began

Annuities have been considered as wise investments so far. Annuities are the most prudent way of building the wealth, since they allow consumers to defer paying their taxes on income.

Equity indexed annuities marry benefits from two conventional types of annuity;

Variable Annuity
  • It allows consumers to place their funds in investment grade security according to their own choice.
  • It gives higher gains. However, it offers higher risk too.
Fixed Annuity
  • It ensures a fixed and insurer-guaranteed return.
  • It provides modest returns while guarantee is exchanged.

Risks Related To An Equity Indexed Annuity

Equity indexed annuities give the best market-driven returns along with minimum guaranteed return. But, still you may lose money by buying equity indexed annuities.

For some reason, if you require terminating your annuity, before the prescribed period of time, you will lose money. Despite a guarantee, you will lose if the guarantee covers any amount which is lower than total amount you have paid for your annuity. Usually, it will take several years to break on your equity indexed annuities.

Your loss may be compounded by big surrender charge along with federal tax penalties for canceling your annuity before time. Some insurance companies deny interest credits from the annuities which are not held on till maturity.

Factors that Impact Income

Equity indexed annuities are very much attractive, but complex too. These are added with features which have impact on your gains.

While an insurance company credits its equity indexed annuities' clients with lower returns than the actual index gains; it means different issues come into play. The factors are mentioned below (using numeric from SEC website):

Participation Rates - How much the index is raised is utilized to calculate your index-interest rate; for instance,

  • Participation Rate = 80%
  • Index Gains = 9%
  • Therefore, the annuity return = 9% x 80% = 7.2%

Margin, administrative fee or spread - Percentage deducted from any index-gain; for instance,

  • Margin = 3%
  • Index Gains = 9%
  • Therefore, the annuity return = 9% - 3% = 6%

Interest Rate Caps - Highest rate of interest that you can yield; like,

  • Upper Limit Cap = 7%
  • Index Gains = 7.2%
  • Therefore, the annuity return = 7%

Insurance companies use indexing method to calculate the equity indexed annuity gains. Equity indexed annuity gains can significantly impact consumers' income.

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