The Overlooked Annuity – Equity Indexed Annuities

Equity indexed annuities have a place in many people’s retirement accounts. Unfortunately, they are not as well known as variable or fixed annuities, and customers and sales reps often overlook them for lack of awareness. Equity-indexed annuities offer a way to fight inflation, participate in the market, and still remain risk-free. Stock-indexed annuities are a mix of the fixed annuity and the variable annuity. They offer a base rate that the company guarantees regardless of market conditions. In this way, they are very similar to fixed annuity. They also track a specific stock index like the S&P 500 and give the policyholder a percentage of the growth if the market goes up. The percentage varies from policy to policy.

There are differences in the percentage you get and differences in the caps. A percentage cap is the highest amount that the policyholder will receive regardless of market conditions. Sometimes the upper limits are only 8 to 10 percent. Others may exceed 20 percent or contain no cap. Of course you want a policy that allows for as much growth as possible, and often people think they can achieve this by taking a policy with a higher limit. This is not always the case. The higher the cap, the lower the base or participation rate. If you have a 20 percent cap and a 50 percent cap, you won’t get as much income in most market years as the man who has a 90 percent cap and a 12 percent cap.

The higher the base interest rate, the more you get in bad market years. Depending on the time and market situation, a lower participation rate with a higher guaranteed interest rate leads to a higher policy return. It’s important to find the perfect policy for your situation and beliefs when choosing stock-indexed annuities. Equity-indexed annuities also include different redemption periods. A buyback period is a period you must meet to remove funds without penalty. Each policy has a different time span and way in which they calculate the penalty. For those nearing retirement, it’s important to choose an equity-indexed annuity that fits your retirement plans. Always check the cost and duration of return fees before making a purchase.

Access to stock-indexed annuities to remove just a portion of the money may be available in the policy you select. The amount of the fee-free payout varies from policy to policy. You have to find the best for your situation. Some offer up to 10 percent cumulative payout each year. That means if you don’t use the withdrawal rule for a year, it accumulates and allows you to withdraw 20 percent the next year.

Regardless of what the policy states, you must select a stock index that you believe will offer years of growth potential. In addition to policies that use an American stock index, there are those that focus on emerging or foreign markets. A financial specialist will often provide information to help you choose the appropriate policy.