Definition of Equity Indexed Annuity
Equity Indexed Annuity (EIA), also known as a fixed indexed annuity, is a type of annuity plan that provides investors with a principal protected investment tied to a stock market index, such as the S&P 500. Contrary to direct stock market investments, these annuities have a defined minimum guaranteed return, ensuring that the principal amount is somewhat safeguarded.
Key Features:
External Reference or Equity Index Link: EIAs earnings are linked to the performance of a specified equity index. The return on the annuity is calculated based on a formula connected to this index, potentially increasing the interest credited to the annuity account, dependent on the stock index performance.
Minimum Guarantee: Even if the linked stock index performs negatively, the annuity is structured to provide a minimum guaranteed return. This protection is typically at least 0-1% per annum, ensuring that the investor’s capital does not decrease due to market volatility
Participation Rates: This is the percentage of the index’s gain that will be credited to the annuity. For example, if the participation rate is 75%, and the equity index has increased by 10%, the increase in the value of the annuity would be 7.5%
Pros and Cons of Equity Indexed Annuities:
Pros:
- Reduced Risk: Protect against the downside of stock market fluctuations with secured minimum returns.
Cons:
- Caps and Fees: Earnings are often capped, which means that the increase in annuity value will not exceed a certain maximum percentage, regardless of how high the stock index might surge. Additionally, these annuities can come with substantial fees and surrender charges if withdrawn early
Types of Equity Indexed Annuities:
There are several different contract designs, some of the moulds being major types includs :
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Investing in an Equity Indexed Annuity
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