What To Consider When Investing In Equity Indexed Annuities I
Equity-indexed annuities can give you guaranteed annualized profits
, making these good options for seniors who want to decrease the overall risk of their investment portfolios. Before investing in an EIA, you'll need to determine the minimum returns, as well as the exact features guaranteed. Typically, EIAs with the highest profit potential may not have guaranteed minimum gains, but only guarantee the safety of the initial investment.
EIAs have unique features, such as the ability to credit higher returns to an investor's account when stock market conditions are up. What you'll need to do is understand how the rates of return are calculated, as the published returns of the index aren't what investors usually earn. For example, a 10% increase in stocks won't necessarily translate to 10% in your account. Also, you don't need to become an expert on these annuities, but you'll have to know the definitions of these terms in the annuity's policy. Here are a few terms you'll have to research on before buying an EIA:
What is an index? Various stock indexes come with different degrees of volatility and return rates. You'll have to get a good grasp of the index your prospective policy uses, as well as the possibility of the insurance company changing the index.
What is a participation rate? 100% participation happens when your annuity's insurer places credits into your account; credits equal to the index's calculated return. Usually, many insurers credit your account at half to three-fourths of the calculated return - this puts participation rates between 50%-75%.
What is a return ceiling? A strong bull market won't give you full returns despite 100% participation, as many EIAs have limits such as the return ceiling. This particular limit sets maximum yearly returns independent of stock returns, and is usually between 7%-10%. Also, there are some equity-indexed annuities that set returns over two years at a 15% maximum.
by: Carina Smith
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