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Learn About Equity
Index Annuities
By Scott Walker
‘Save for a rainy day’ is a wise
old saying and there are many ways you can prepare for the sunset of
your life. Investing in an annuity is one way. 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!
