Submitted by: Jonathanm Tyler
Equity indexed annuities are relatively new products to the market and offer the best of all world’s to the investor. These retirement annuities increase in value when the market rises but they don’t lose money if the market drops. Instead, they receive a fixed interest rate promised in the contract. While not all equity indexed annuities are ties to the same type of index, many use the S&P 500 as their benchmark.
There is a price for the investor to pay when they use this type of retirement annuity. Since the company takes all the risk, they also get some of the reward when the market rises. Often contracts vary in the amount of the market growth that the company gives to the owner of the annuity. These are the annuity’s participation rates. Some companies offer as high as ninety percent of the growth while others offer as little as fifty percent.
However, if you think that the ninety percent is always the best deal, think again. Often the contracts with the lowest percentage of market participation make up for the difference by offering a higher guaranteed interest rate. If your contract runs during periods of extended down markets, the lower participation rate may actually pay higher because of the number of years the product used the fixed rate to calculate the return.
If you look for indexed annuities see if they offer an annual reset option. The reset option is particularly good in a down market. Every year, the policy resets the amount as the base. In up markets, of course, the company locks in and credits your growth each year. In a down year, the company pays you the guaranteed rate, however, they reset the baseline so that when the market volley’s back, you reap the rewards.
Some companies use a point-to-point contract. Most of the time, the company calculates the growth from the day you started the contract to the day when the contract term ends. While it’s not as advantageous as the annual
Some of the equity indexed annuities have a cap to the percentage amount you can receive as a gain. If the policy has an eight percent cap then even if the market jumps 22 percent and the investor has a ninety percent share of the growth, the maximum return he receives is still only eight percent.
Most people use equity indexed annuities as deferred contract, but you can use an equity indexed annuity as an immediate annuity also. The difference between the two is the time when you take payment. On a deferred contract, you expect a payout later, or never in some cases and the funds go to a beneficiary. In an immediate annuity, you begin a stream of income right away. An immediate annuity is excellent for someone that wants payments for the rest of their life, no matter how long they survive.
Equity indexed annuities are good for those that want to keep up with inflation but still require safety. Make certain you check not only how the company calculates the return, but also how often they do it, in order to get the best policy.
About the Author: Jonathan M. Tyler provides the latest market news and advice to help you choose the right retirement
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