Equity Indexed Annuities
Finding Out What an Equity Index Annuity Is
If you’re planning on investing some of your money, you might want to try putting your money on annuities. Yes, you read it right, annuities are forms of investments wherein you put your money under the care of an insurance company. In exchange of the investment, the latter will in turn guarantee you monthly payments depending on factors such as the amount of initial investment and the period of the investment. There are different kinds of annuities. Each one has their own advantages. An equity indexed annuity is one kind.
Just like any annuities, an equity-indexed annuity is a contract between the investor and the insurance company. After you have paid the company a lump sum payment, the insurance company will then pay the investor a return or basically the earnings of the invested money which is based on changes in an equity market index, such as the S&P 500 Composite Stock Price Index.
In an equity-indexed annuity, the insurance company usually guarantees a minimum return. After the end of the accumulation period, you being the investor will receive payments from the insurance company according to the stipulations of the contract. You can have the insurance company pay you in a lump sum or in periodic payments as long as these are according to the signed contract. It is really up to you.
There are a couple of benefits in investing in equity indexed annuities. The best one is it is practically a no-lose investment, well at least if you played your cards right. But and this is a big but, if you cancel out your annuity early, even before the end of the period stated in the annuity contract, it is for certain that you will loose money from your investment.
When you cancel early, there are fines and tax penalties to pay, plus insurance companies may hold it against you and will not pay you with index-linked interests if you withdraw part or all of your money from the annuity agreement before it matures or the term ends. Also, even if the amount has been guaranteed it is still possible to be on the loosing end in an equity indexed annuity program. If the guarantee amount is far less that your purchase payments, the guarantee will not hold and it will be useless.
Equity-indexed annuities are not as simple as fixed immediate annuities. The former needs to consider a lot of factors especially in the computations of how much the insurance company will pay the investor. Don’t get surprised if you receive payments that are less than what you have originally expected. Some of the elements used in calculating for the payment amounts are the participation rates, and interest rate cap. We use participation rate to measure how much of an index’s increase will be used to calculate the proper index interest rate.
Another factor that plays a major role in computing for the right equity index annuity rates is the margin fees which are sometimes called spread fees and at times administrative fees which is usually subtracted from the the index-linked interest.
There are basically three types of indexing methods that are used in equity indexed annuities and these methods also affects how much interest rates are gained from investing on index annuities. Briefly these are annual reset, high water mark, and point-to-point indexing methods.