Tradeoffs In Stock Based Annuities
If you're thinking about buying into stock-based annuities or equity-indexed annuities
, you'll need to know a number of things about the particular EIAs you want to purchase. These considerations include the method used for calculating investor returns, participation rate, return limits, and other aspects. Once you've shopped around for these types of annuities and narrowed down your choices, you can pick the one that's most suitable to your financial goals by comparing trade-offs.Annuity providers usually have a line of products with varied participation rates, return formulas, and return limits - these are the things you have to check when picking out an EIA. If the annuity has a participation rate that's lower than 100% and a limiting valuation formula, it typically has high return ceilings of around 10%. In comparison, an EIA with 100% participation usually has lower yearly return limits ranging from 7%-8%. A broker or insurer can promote a particular annuity by focusing on a specific feature, so make sure that you take other aspects into account.
Also, the combination of factors that seems most profitable may not actually prove so. Assume that a couple of EIAs are benchmarked by the same index, and have the same yearly returns of 10%. EIA "x" may allow 100% participation with a 7% limit, while EIA "y" has a 10% limit and a 75% participation rate - X will credit investors with a 7% annual return, while Y will give investors 7.5%.
Market returns have shown that investors have better chances at bigger profits with lower participation and higher yearly return limits. This is because annual index returns don't tend towards averages. For example, high-performing years are way higher than averages. If these trends continue, annuity holders may find the higher cap/lower participation rate combination a good guideline for the profitability of a stock-based annuity.
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