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EQUITY INDEXED ANNUITIES
An Equity Index Annuity (EIA), is a new type
of fixed annuity designed to meet market demands. An EIA offers all the safety
and guarantees of a traditional fixed annuity, but it goes a step further.
EIA, was first introduced in 1995. This new type of annuity has grown steadily
inn popularity with sales exceeding $5 billion back in 1999.
linked to the performance of various stock and bond indices, such as the S&P,
the Dow Jones Industrial Average, Russell 2000 and the 10-Year US Treasury Bond
Index. Equity Indexed Annuities appeal to people who want to earn competitive
rates of return on their investment without the risk of loss of principal. Even
though these indices are generally tied to the stock market performance, Equity
Indexed Annuities, they are not securities. They are single-premium traditional
tax-deferred annuities. Equity Index Annuities are very attractive for a number
On the top of the list of reasons to consider an EIA is the
protection of principal. Unlike mutual funds, individual stocks, bonds or even
variable annuities, with equity index annuities you can not lose your principal,
regardless of market fluctuation. EIAs also have a minimum rate guarantee. The
idea is to offer higher performance without exposing principal to market risk.
I can not help to think about all those people that got caught up in the stock
market buying frenzy of the late 90's. Had those people invested in an EIA they
would have their principle in tact, plus a minimum guaranteed return. Will Rodgers
once was quoted " I am much more concerned about the return of my money,
than the return on my money."
At the same time, the EIA policyholder
participates in market gains, but with some EIAs you do not realize 100% of the
gain in the market. Still others credit up to 125% of the index in the fund. Generally
these EIAs come with a maximum interest rate that can be credited to a policy
in a policy year) See EIA Definitions.
are hundreds of EIAs on the market today and, though similar, no two are alike.
Several factors (parts) play a part in determining EIA policy design, and they
- Participation Rate
- Renewal Option
- Interest Crediting Method
- Yield Spread/ Margin Charges
- Premium Loads
Charges and Surrender Period
Definitions of EIA terms here
These are often referred to as moving
parts because the issuing insurance company may have the ability to change
these terms. Three critical components of an EIA that can move are participation
rate, yield spread (annual asset fee) and the cap.
For example, the policy
may guarantee a participation rate for just one year, allowing the insurance company
to adjust the rate in future years.
Likewise, the yield spread design typically
allows the company to change the amount of the spread after one year. And the
cap often can be adjusted after one year.
These moving parts are obvious
used to protect the insurance company and are almost always operate to the disadvantage
of the policyholder.
All things being equal, the higher the participation
rates, the more frequently the averaging will occur, the lower the cap, and the
higher the asset fee, or vice versa.
Truth About Annuities
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