An equity-indexed annuity (EIA) is an annuity that earns interest that is linked to a stock market or other equity index, such as the Standard and Poors 500 Index. Investors in EIA contracts can choose from a guaranteed rate (similar to that of short or intermediate term CD’s), a rate that is linked to the equity index rate, or a mix of both. This allows for participation in the opportunity for growth with the protection of principal.
What are the features of an Equity Indexed Annuity?
An equity indexed annuity (EIA) is an annuity that has features of both fixed and variable deferred annuities. EIAs involve more limited risk than variable annuities, because they feature protection of principal unless canceled (or surrendered) early in the policy’s term (during policy’s stated “surrender” period). EIAs also involve more limited reward than variable annuities, as they typically involve a cap on the amount of growth the account can experience, regardless of how quickly the market grows.
One of the key benefits of the EIA is the flexibility it offers to choose between fixed or variable returns and to periodically adjust your choices. Some products also allow a percentage of the account to be drawn out as income without the need to annuitize the contract. This flexibility makes the EIA a powerful income planning tool.
When is an Indexed Annuity not appropriate?
Equity Indexed Annuities are typically not a good choice for younger people with a high risk tolerance and very long investment time horizons. They are also not appropriate for someone that needs access to a large portion of the principal in their contract within the surrender period, or the time frame when you pay a penalty to take money out of the annuity. Be sure you understand how long the surrender period is and what the charges are to withdraw money during that period.
Is an Indexed Annuity right for me?
Indexed Annuities are a good alternative for people that want to limit their downside risk but would still like to have some limited participation in the returns of the market. Their flexibility makes them a great retirement income management tool and a good fit for many retirees. An important consideration is that money placed into EIAs is not as easily accessible as some other vehicles, such as mutual funds or even fixed annuities, so they are best suited for money that will not need to be moved or withdrawn completely in the near term.
Your Peak American Financial Advisor can help you decide if an indexed annuity is a good fit for you!