Equity Indexed Annuities

Annuities Indexed  Equity By Toma Franklin, Staff Writer

One of the key issues facing every investor is to find the right balance of risk as opposed to gain. If you play it safe, you get back minimal returns, with some pre-specified interest. If you go for high profit margins, the risk factor is something that you learn to live with. Faced with these opposing current, the insurance industry has come up an innovative solution in the form of equity indexed annuities, which give an investor the best of both worlds – A percentage share in profits, if any, from investments in the stock market, coupled with the security of a guaranteed minimal amount.

The returns from these annuities are based on the increase in the stock or equity index, such as the S&P 500. If stocks go up, you get a share of the profit. If the stocks fall, you won't lose any money, since your contract assures you minimal returns of principal amount plus pre specified interest (usually 3%). In effect, you have a chance of making a profit, but you are not liable to bear any losses. So who does? And how can someone offer you stock market profits without putting your investment at risk?

The insurance company that issues the annuity takes a percentage of the profits from the increase in stocks. The percentage of profits allocated to you may vary from 50% to 90%, depending on the company, amount of investment and the type of contract. The risk of investments being wiped out at the stock market is taken entirely by the company. Therefore, you are paying a part of your stock market profits in return for the company assuming all the risk.

There are many things which you need to factor in, before you can even begin to think about the returns from equity indexed annuities. For example, people who purchase such an annuity at the start of a prolonged stock market crash, such as that in the 70's or just before the dot-com bubble crash of 2001 may have to adopt a purchase and hold policy. They will have to wait until the market breaches the previous high and keeps going up even further, before they can consider the annuity as a profitable investment.

This requires patience, a long term point of view and an in-depth knowledge of how stock markets and indexed annuities work. The silver lining here is that you only have to worry about profit, and not the loss, unlike traditional stock market players.

Please note that equity indexed annuities are long term investments, and subject to surrender changes plus and IRS early withdrawal penalties prior to age 59 ½. to the tune of 10%. However, under certain conditions, you are allowed to withdraw up to 10% of your funds without incurring any penalty.

The specific terms of the EIA, and how and when interest is credited to your account will vary depending on the issuing company. For example, the interest could be credited annually based on the increase in the value of your account, or the contract may specify that the interest is calculated only at the end of the term of the EIA, which could extend to years. The amount of profit you can make from a rise in the linked stock index also changes depending on the type of EIA and the issuing company. They can set an upper limit on potential gains by allocating a percentage share of index performance, growth caps or they can implement margins.

An EIA is a tax deferred investment opportunity and if you expect to be in a lower tax bracket during retirement, then you have another powerful incentive to invest into equity indexed annuities. Please note that the possible benefits from an EIA may vary depending on the terms of your contract, market fluctuations, withdrawal date and the sagacity of the investing company. As with any investment, default risks apply and consultation with a trusted financial professional is advised.