Equity Indexed Annuity

Equity Indexed Annuity
by Takara Alexis

It isn't every day that you find the opportunity for potential growth containing true safety in the same financial vehicle. Commonly investors are urged to make one of two choices, either they give up a degree of safety in exchange for a bigger potential for growth or they accept less growth in exchange for a higher degree of safety.

Thanks to an innovation in the insurance industry, you can have the potential high returns available in the stock market and the security of a guarantee-it's called an equity indexed annuity.

Equity indexed annuities are exceptional back up choices for investors looking for safety in a low interest rate environment or a volatile market. Here's how they work, your return is based on the growth of a stock or equity index, such as the S&P 500.1 If stocks rise, you benefit from the increase. If stocks crash, you do not lose any money, most contracts guarantee a minimum return, commonly 3%.2 This is what makes these newer products so attractive to retired people and to those reaching retirement.

Now, imagine this scenario: Suppose you and I take a trip to Las Vegas for a few days. I decide to make you an offer. You could gamble at one of the casinos as much as you want for the whole time we're there and I will guarantee you in writing that even if you do bad you will not lose. In fact, I promise that you will walk away from the tables with no short of what you began with, plus some interest. If you win, you get to keep the winnings.

Clearly, there is no such thing as a free lunch, so the company that hands out the annuity will restrict the maximum returns that you get from a rising market in return for the downside protection they provide. This limit depends on the particular indexing method that the annuity company uses. One of the most common methods used to limit returns is something called the "participation rate."

Let's take a look at another hard time in the market and see how the index annuity would have carried out utilizing the annual reset method. One really good example of a prolonged bear market was the 1970's, in the 1973-74 downturn stock prices fell more than 40%. The S&P 500 closed at an all time high towards the end of 1972 and it was not until 1980 that these levels were retraced.

In today's market environment it is hard to beat an annuity that only goes up. Many seniors who fled the stock markets, locked in gains and purchased equity index annuities. They're now waiting for an upturn, which will generate further gains for them, not just a recovery to former highs. The use of these vehicles has allowed them some comfort during market fall offs.

Due to the complexity of equity index annuities I firmly suggest you consult with a knowledgeable investment specialist to see how they could fit into your financial plan.