Investors are now looking for security and safety more than ever after the stock market correction of 1999-2002. Many variable annuity and brokerage accounts have not been able to recover their losses over the past four years. Many investors had been counting on these funds to provide income in retirement.
The equity indexed annuity (or EIA) was introduced to the main stream market. The equity indexed annuity is a reliable alternative for a brokerage account and can offer a higher return than the traditional fixed-annuity. These accounts are only fifteen years old and have received several billion dollars.
Annuities for General
A potential investor needs to have some background information. An annuity works in the following way: The potential investor (also known as an owner or annuitant) agrees to deposit funds with a company for a specific period of time. This could be 7 years. During that time, the annuity will be considered to be in deferral. Annuities that are in deferral will allow partial distributions of interest gain, a 10% annual withdrawal free or the minimum distribution required by the I.R.S. Annuities that allow partial distributions of interest gains or a yearly 10% free withdrawal, or the minimum distribution required by the I.R.S., are available in deferral. If the consumer chooses to withdraw the entire contract as a lump sum, penalties will be inflicted based on the surrender plan. If the investor dies, the lump sum annuity is paid at the death of the beneficiary, unless other arrangements are made.
Technically, equity-indexed annuities can be referred to as fixed annuities by each state’s Department of Insurance. This means that the investor does not have any type of variable security, such as a stock, bond, or mutual fund, within their EIA account. These accounts are not subject to fluctuations in value as a variable annuity. The equity indexed annuity, however, is not the same as a traditional fixed annuity.
The Equity Indexed Annuity Benefit
EIAs are different from traditional fixed annuities in that interest is credited to the account. Typically, an option is purchased by the insurance company in a specific index such as the DOW, S&P 500, or the NASDAQ. The option contract becomes due after a certain period, typically one year. The option contract will become due if one of the following happens. If the market index is rising, the option can be cashed in and the interest is credited towards the annuity principal. If the market is falling, the option can be cashed in and interest is credited to your account.
The annuity gains or maintains its value every year in practice. However, it cannot lose value due the negative effects of market fluctuations. All EIAs come with a minimum guarantee for their returns. This guarantee could state, for example, that the company will pay 2% of 88% of the premium deposit if the market falls every year during the term of the annuity. This safety feature is not usually used. As an investment option, most equity-indexed annuities offer a fixed interest account. The fixed account can be used to credit interest to annuity principal when interest rates are high or the stock market is declining.
Equity Index Performance
What are the returns on these annuities? These accounts have historically returned an average of 7% or higher. EIAs have been performing well in years when the wider markets have performed well. Investors can enjoy interest payments of between 10-20% and better during these years. These accounts are of critical importance because they can be accessed during market declines. The equity indexed annuity will retain its principal and interest gains from previous years.
These facts could explain why EIAs are so popular, particularly among retired people who want to keep a lifetime of hard work. Many consumers want safety and security, but not sacrifice reasonable returns on their investments. This is despite the market’s rapid decline. These annuities won’t return 50% in a year like a lucky stock or fund pick, but they provide investors with the assurance that their investment will not decline.
A.M. Hyers is a veteran of the investment and insurance industry for almost ten years. He is the owner and operator of Ohio Insurance Plan, an independent agency that does business in Ohio and Missouri.
