What To Consider When Investing In Equity Indexed Annuities Ii
Equity-indexed annuities can be a great investment for seniors who want to offset
the comparatively high risks involved with other investments in his or her portfolio. Aside from considering factors such as the index, participation rate, and return ceiling before buying an EIA, you'll also have to consider other aspects such as return formulas, the point-to-point method, and the averaging method.
What is a return formula? Return formulas are one of the aspects that directly influence how much you can make from an EIA. Expert analysis estimates the number of these formulas used to credit EIA accounts above 30. To illustrate, assume that a policy has a participation rate of 75% and a yearly ceiling of 8%. You may think that an index with 10% total annual return will give you 7.5% returns in your account, but this probably won't happen.
Most return formulas can be complex. There are a couple of basic kinds of formulas these thirty-plus return formulas are based on, with varying details, clauses, and qualifications: the averaging method and the point-to-point method.
Many investors assume the use of the point-to-point method as a return formula for the EIA. Here, the variance between the ending and starting values of the index over a certain duration is used to calculate what's credited to the investor's EIA account. In bull markets, the point-to-point method can generate higher returns compared to other formulas, although this benefit is offset by the degree of risks and volatility involved in a stagnant market. Also, it usually comes with lower limits, rates of participation, and lower ceilings compared to different methods.
The averaging method adds an index's ending values for a certain period within a longer averaging duration. The sum is then divided by how many periods there are. The variance between the starting value of the index and its average is results in the annual return. This method of calculating the returns of equity-indexed annuities gives significantly different yields compared to the point-to-point, as positive market moves usually happen with smaller time frames; with flat or weakening indexes at other times.
by: Carina Smith
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