Equity or Fixed Indexed Annuities

Fixed Index AnnuityUp until a decade or so ago, your choice of annuities came down to fixed annuities – which promise a guaranteed rate – and variable annuities – which is non-guaranteed and based on stock market investments. But more and more, successful individuals are turning to a third choice: indexed annuities. Until 2006, it was called equity indexed annuities but now it is called fixed indexed annuities or indexed annuities.

Fixed indexed annuities are designed to mirror the performance of one of the well-known stock indices such as the S&P 500. You can participate in the upside of the stock market while minimizing your risk of its downturns. Equity indexed annuities assure a minimum guaranteed interest rate that you will receive after a certain duration of time. You also gain a shot at higher interest gains if the stock market index rises. Insurance companies use a variety of formulas, depending on the design of a particular annuity, to determine how a change in the index correlates to the amount of interest that will be credited at the end of each index term (most commonly on an annual basis). The formula used usually consists of two parts, the crediting method such annual point-to point, multi-year point-to-point, monthly point-to-point, monthly averaging or daily averaging and; a limiting factor such as cape rate, participation rate & spread rate or margin.

Fixed indexed annuities – like their fixed annuities counterparts – have maturity dates that range from six to ten years, a declining surrender charge schedule, and tax-deferred growth. The difference is they do not pay a set rate of interest; you receive some portion of the benchmark stock index growth.

The equity indexed annuities participation rate is generally ranges from 60 to 90 percent. Suppose, for example, you purchase an S&P 500 contract and, over the ten-year contract, the index rises by 100 percent. You would realize about three-quarters of that growth without risking your principal.

Fixed indexed annuities should be carefully considered by successful individuals who are seeking higher returns than traditional guaranteed investments but do not wish to risk their principal. Not all equity indexed annuities are same and they are quite complex. It can be a great investment if done right and can be an absolute poor choice if purchased from a wrong insurance company or from a wrong advisor or for a wrong reason. More mature investors nearing retirement who still want to benefit from the growth of equities may be a good candidates for equity indexed annuities if they have more than 5 million in the net-worth.

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