Thursday, April 24, 2014

How To Choose The Best Equity Indexed Annuities

By Essie Osborn


It's advisable to go about this in a step-by-step manner, starting off by learning how a basic annuity product works and how the growth in the account can be set to track an index. Once an investor understands it works, it becomes far easier to find the best equity indexed annuities. All that needs to be done is to compare the EIAs available based on a checklist of factors such as minimum interest rate guarantees, choice of index and the participation rate therein.

At its core, the annuity is a contract of sorts between the buyer and an insurer. The annuitant must pay the insurer a sum of money either in regular premiums or as a lump sum. The insurer likewise agrees to guarantee an income stream for the annuitant, with said payments starting immediately or deferred until after a date specified in the contract.

It's an arrangement that makes for an excellent retirement investment account. Annuitants pay in premiums every month from their paychecks, and can expect to start receiving payments once they retire. The terms and structuring of this product may vary a lot in addition to basic differences such as premiums vs. Lump sum, immediate vs. Deferred, etc.

It could be an individual or group contract, and the interest rate offered during the accumulation period may be fixed or variable. The fixed type offers returns at an interest rate specified in the contract. The exact dollar amount of the premiums that the annuitant must pay in is also specified. Variable contracts offer returns that will vary based on the performance of the underlying investments into which the premiums are invested.

Yet another variation is that the interest rate offered by such investment accounts may be linked to an index. What kind of index it should be pegged to depends on the kind of product, but it can in theory be an index for stocks, commodities or anything else. If the product is an annuity, then the ideal choice would be the S&P 500, Russell 2000 or another such equity index.

Buyers looking for an EIA need to compare products based on certain specific factors. The choice of index is obviously the primary concern. However, the method used by the insurer for tracking it is also very important.

Some companies use a method known as point to point, where the rate is adjusted on certain key dates such as at the beginning of the contract and on the maturity date. If the index gains a lot and also loses the gain in between these points, then the annuitant realizes no benefit. This shows the importance of finding an annuity whose rate is frequently adjusted to closely match the index.

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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