Buyer's Guide To Best Equity Indexed Annuities

By Essie Osborn

It would be best to start with an understanding of the concept of an annuity, followed by a short primer on how investment accounts are linked to an index. It will then be very easy to understand how to find the best equity indexed annuities. All that needs to be done is to choose an EIA based on factors such as the index it is pegged to, the minimum guaranteed rate of return, and the participation rate.

An annuity is a financial product offered by an insurance company which enters into a contract with the buyer. This annuitant agrees to pay the insurer a lump sum amount or regular premiums. The insurance company in turn agrees to provide the buyer an income stream with regular payments that may start right away or at a future set date specified in the contract.

It obviously works great as a retirement plan account. The annuitant pays in a monthly premium out of his or her paycheck to build up the account, and then expects to be provided an income stream after retirement. Apart from the payment options (lump sum vs. Premium, deferred vs. Immediate, etc.), the way in which the contract is structured varies quite a bit in other ways too.

For instance, the contracts don't have to be just for an individual, and may cover a whole group. The rate the insurer offers may be variable or it may be kept fixed. The latter type of contract specifies the exact dollar amount in premiums that need to be paid each month, and it also specifies the interest rate that will be paid on the accumulated funds in the account. The earnings in a variable annuity account, on the other hand, depend on how well the underlying investments perform.

The interest rate offered by this kind of an investment account may also be linked to an index. Depending on the type of financial product, it may be indexed to anything from a stock index to a commodity-based one. In this case where the product is an annuity, an equity index such as the S&P 500 or the Russell 2000 is usually the best choice.

An EIA buyer should be looking at a few specific factors to choose the right annuity. The index to which the growth is linked is obviously of paramount importance. But the method the insurer uses to track the chosen index is just as important.

For example, some insurers use a point to point system where the rate is adjusted at a couple of key dates, such as the start date and then at maturity. If the index rises up and stays at a high level in the interim before coming down again to where it was by the time the annuity accumulation period ends, then the annuitant loses out on a lot of earnings. It is, therefore, extremely important to choose a product and provider that tracks the index closely and as frequently as possible.

Yet another key issue to be considered is whether the insurer is guaranteeing a minimum rate of return. If so, then the account will earn interest at this minimum level even if the returns based on indexed tracking fall below it. Similarly, there may be a maximum cap which limits the interest earned even if the indexed returns are higher. A standard example of this would be a contract where the interest rate is guaranteed to stay in between 3% to 8%.

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