The Equity Index Annuity (EIA) or Fixed Index Annuity (FIA) is an insurance product that has interest growth based on a stock market index. The Equity Index Annuity is most commonly linked to the Standard & Poor's Composite Price Index, also known as the S&P 500 Index. This type of structure allows the annuity owner to participate in market trends, without actually owning individual stocks. The index is used to determine the annual interest rate that will be paid on the equity index annuity contract.
Most of the contracts provide the investor with a guaranteed minimum interest rate. In years that the market increases, the fixed index annuity grows with the growth of the index. During down years, the guaranteed minimum interest rate kicks in. This allows the contract owner to protect their principal from market fluctuations.Check this useful information on ultimatemerchantproviders.com.
The equity index annuity can be a powerful retirement planning tool during recession years. While the market is dropping, the principal that the annuity owner relies upon for their retirement remains protected. When the market does turn around however, the fixed index annuity participates in the market upswings. This can be an excellent way to participate in big market gains, while protecting against negative market volatility.
A large portion of the equity index annuity accounts available are deferred fixed annuities. This simply means that the annuity owner makes more than one payment to the insurance company. The payments back to the fixed index annuity beneficiary are then "deferred" for a year or more.
What resources are available to learn more about equity index annuity contacts?
There are a couple of topics that you need to research before you purchase an equity index annuity. We've provided articles on a couple of the important topics to explore. While it is true that these types of contracts participate in market upswings, it is important to understand that the interest rate is not on a 1:1 ratio with the index. The insurance company will provide you account with a portion of the upswing. They either cap the rate or provide you with a percentage of the growth. This is explored further in the article on Equity Indexed Annuities Caps and Participation Rates.
When selecting your fixed equity index account you also must choose the interest crediting option that best fits your needs. The two most common types are annual point to point and monthly averaging.
- Article: What is the S&P 500 Index?
- Article: Monthly Averaging Interest Crediting Option
- Article: Annual Point to Point and Annual Reset Provisions
- Article: Equity Indexed Annuities Cap and Participation Rates
What are the advantages of the equity index annuity?
The primary advantage of the equity index annuity is the protection from market volatility while participating in the market upswings. This allows the annuitant to protect the principal of their account, but also gives them the growth potential of riskier investment vehicles. In retirement years, it is important to protect your principal and not outlive your income. The fixed index annuity can provide this type of protection.
Most equity index annuity accounts are also tax-deferred. Tax-deferred growth allows the annuity account values to grow at a much faster rate than vehicles taxed first. All of the money that would normally be paid out in taxes is reinvested back into the account. The annuitant then has this additional value building interest.
Most fixed index annuity accounts will also provide a lifetime income option. This connects the payments on an account to the life of an individual. As long as that individual lives, the annuity will continue to make fixed payments to the beneficiary.
What are the disadvantages of fixed index annuity accounts?
Similar to other annuity products, the equity index annuity must be customized to your specific circumstances. Equity index annuities are not for everyone. It is important to get sound investment advice before entering into a contract.
One of the primary concerns of annuity contracts is that they can sometimes be difficult to get your money out if you "change your mind." The majority of equity index annuity accounts will also have an early withdrawal penalty or early surrender charge. These charges can be steep and generally discourage extra withdrawals from the account.
Depending on the nature of the equity index account, there may also be tax penalties for withdrawals before age 59 ½. This is because of the tax-deferred nature of some of these types of accounts.
Equity Index Annuity Summary
The Equity Index Annuity can be a powerful planning tool if used properly. It is important to educate yourself regarding these investments. By reading this far, you have already made a good first step. We encourage you to read the rest of the website and be sure to investigate the different areas that you need to address regarding these equity index annuity accounts.
Equity index annuities can provide you with a secure retirement income and allow you to continue to participate in a portion of market upswings.