Equity Indexed Annuities
Equity indexed annuities are essentially the same thing as fixed indexed annuities, only by a different name. This can make things a bit confusing for individuals trying to discover the best type of annuity for their retirement fund, but it is important to know the different termonology. These types of annuities earn interest based on an equity index or stock. The most common basis on which to earn interest is Standard & Poor’s 500 Composite Stock Price Index.
The Appeal of Equity Indexed Annuities
Equity indexed annuities are attractive to many people because of the security they offer in addition to the higher earning potential. Many equity indexed annuities offer a guaranteed minimum earning amount, usually around 3 percent annually, although there is the potential to earn much more depending on how the market is performing at the time. This earning potential is comparable to a variable annuity to a point, but not quite as high. The biggest advantage of these annuities is that the investor is guaranteed that their account value will never be less than 90 percent of their principal investment, a guarantee that is not available with variable annuities.
The Drawbacks of Equity Indexed Annuities
As no annuity plan will ever be totally perfect in every area, there are a couple of disadvantages to the equity indexed option. First, many companies calculate the awarded interest based on the participation rate of the investor. That means that the account will only earn the same percentage of the actual index value as their participation rate. If the participation rate is 75 percent and the index value is at 10 percent, the annuity will only earn at a rate of 7.5 percent.
Also, there are usually caps to the amount of interest that will be awarded, despite what the index is showing. This means that if an annuity is capped at 10 percent, that is the most interest it will be capable of earning, even if the index value is double or triple that. It is extremely rare that this is ever quite that large of an issue, but it is important to know if an account is limited in earning potential, no matter how small the difference.
On the other hand, equity indexed annuities also typically offer floors for minimum indices. This does offer some protection for investors should the index value fall into negative numbers. 0 percent is the typical floor, although some companies may offer slightly higher floors. This feature helps to counter the cap placed on the account and offer protection for those time that the market is performing poorly.
There may also be other features of individual equity indexed annuities that compensate for any drawbacks of the plan. For that reason, it is important to be sure of all of the options before deciding on the one that is best for the individual. Since this can be a rather confusing area of study, most people will do best to consult a trusted financial professional for help in determining the right course of action.
If you are new to annuities altogether, you’ve come to the right place. Here at Lump Sum Annuity, we want you to be fully educated on this important topic. Our page entitled Annuities for Dummies is perfect for the newbie who is thinking about retirement options.
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