Equity Index Annuities

Equity Index Annuities

An equity-indexed annuity (EIA) is a contract between you and an insurance company in which during the accumulation period (typically 3,4,5,6,8,10,or 12 years) the insurance company credits you with a return that is based on changes in an equity index, such as the S&P 500. The insurance company guarantees a minimum rate of return with most contracts.  After the accumulation period, the insurance company will give you a choice to receive your contract value in a lump sum or receive your money over a term such as 10, 20yrs or lifetime income stream.

It it important when purchasing an EIA that you choose a term period that will fit into your financial picture so you will not have to take the money out until your term period is up.  There are surrender charges on any money you take out over 10% per year (the free withdrawal amount each year typically) so an EIA is not something to buy if you might need the money in the short-term.

What types of growth “engine” choices do I have to grow my money in the equity index annuity?

  1. Participation Rates: The participation rate determines how much of the index’s increase will be used to credit your account each year. For example, if the participation rate is 75% and the index increases 10%, the return credited to your annuity would be 7.5% (10% x 75% = 7.5%).
  2. Interest Rate Caps: Some equity-indexed annuities set a maximum rate of interest that the equity-indexed annuity can earn. If a contract has an upper limit, or cap, of 6% and say the S&P 500 grew 7% that year, you would get a 6% credit to your EIA.
  3. Monthly Caps: In our opinion this is the best method to choose with most EIA contracts.  How it works is the company will announce a monthly cap limit on each policy anniversary date of typically around 1.5-2.5% per month.  They will take a snap-hot of what the S&P 500 is on the beginning of the month and the end of the money and compute the percentage increase of decrease.  If the S&P was up 4% that month and you had a 2.5% monthly cap you would just be credited the 2.5% for that given month.  At the end of the year they will add up all twelve month’s pluses and minuses and that will be you interest credit for the year.  If the credit say was +8% for the year you would get the 8% on your money and that amount is locked in for the life of the contract.  If the S&P was -8% for the year you DO NOT lose 8% but just get a 0% return for the year.

Each year you receive gains on any credit method you choose your gains are locked in for the life of the contract.  Any years you have negative returns in the S&P your money simply slides over from the previous year’s amount.