An equity-indexed annuity (EIA) is a fixed annuity which during the accumulation period. This period is a choice you will make ranging from 5 to 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, NASDAQ, DOW or popular brand name financial companies’ indexes.
The insurance company protects your principle with a floor and guarantees you a minimum rate of return even if the indexes were negative every single year. This of course if highly unlikely but a nice guarantee non the less. The back tested ten year return of the three leading annuity companies we offer have averaged 9-14% per year. The past of course does not predict the future and the equity index annuity gives you a shot at market like returns without the downside risk.
After the accumulation period, the insurance company will give you a choice to receive your entire contract value in a lump sum or you can choose to receive a guaranteed lifetime income stream.
Exploring the Advantages of Fixed Indexed Annuities
Incorporating a fixed indexed annuity into your financial plan can be advantageous for multiple reasons:
- If you’re seeking the chance for your assets to grow while shielding them from the downturns of unpredictable markets, this could be a strategic choice.
- It allows you to gain interest correlated to the performance of chosen indices, sidestepping the direct risks associated with stock market investments.
- The tax-deferred nature of your investment means taxes are deferred until the time of withdrawal, potentially leading to more efficient growth of your funds.1
- Fixed indexed annuities also facilitate the direct transfer of assets to your heirs, potentially bypassing the expenses and delays of probate.
INDICES
HOW INTEREST IS CREDITED
WHEN INTEREST IS CREDITED
TERMS
Index-Linked Options
You may choose to allocate your entire purchase payment to one interest-crediting option or a combination of options. The amount of money you allocate to each option is up to you.
An external index like the S&P 500®
Point to Point Option (subject to a cap rate or participation rate)
Performance-Triggered Index Option
If a 1-year option, it’s credited annually at the end of the one-year term
The cap rate, participation rate, and/or performance-triggered index rate is set at contract issue. The most common term options are 3, 5, 7 or 10 years. At the end of the contract year, you have the flexibility to reallocate your contract value however you choose or keep the same allocations.
Fixed Account Option
You also have the ability to allocate some or all of your money to a fixed account that earns a guaranteed interest rate.
N/A
Fixed Interest Rate
Daily
The fixed interest rate is set at contract issue and guaranteed for the term length. The most common term options are 3, 5, 7 or 10 years.
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?
- 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 250% and the index increases 10%, the return credited to your annuity would be 25% that year. (10% x 250% = 25%).
- 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 10% and say the S&P 500 grew 17% that year, you would get a 10% credit to your EIA.
- 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.