National Senior Advocate - 1-888-672-6729

The Truth About Equity Indexed Annuities

Equity Indexed Annuites

An Equity Index Annuity (EIA), is a new type of fixed annuity designed to meet market demands. An EIA offers all the safety and guarantees of a traditional fixed annuity, but it goes a step further.

The EIA, was first introduced in 1995. This new type of annuity has grown steadily in popularity with sales exceeding $5 billion back in 1999.

Premiums are linked to the performance of various stock and bond indices, such as the S&P, the Dow Jones Industrial Average, Russell 2000 and the 10-Year US Treasury Bond Index. Equity Indexed annuities appeal to people who want to earn competitive rates of return on their investment without the risk of loss of principal. Even though these indices are generally tied to the stock market performance, Equity Indexed annuities are not securities. They are single-premium tax-deferred annuities. Equity Index annuities are very attractive for a number of reasons.

On the top of the list of reasons to consider an EIA is the protection of principal. Unlike mutual funds, individual stocks, bonds or even variable annuities, with equity index annuities you can not lose your principal, regardless of market fluctuation. EIA's also have a minimum rate guarantee. The idea is to offer higher performance without exposing principal to market risk. I can not help to think about all those people that got caught up in the stock market buying frenzy of the late 1990's. Had those people invested in an EIA they would have their principal intact, plus a minimum guaranteed return. Will Rodgers once was quoted "I am much more concerned about the return of my money, than the return on my money."

At the same time, the EIA policyholder participates in market gains, but with some EIA's you do not realize 100% of the gain in the market. Still others credit up to 125% of the index in the fund. Generally these EIA's come with a maximum interest rate that can be credited to a policy in a policy year. See EIA Definitions.

There are hundreds of EIA's on the market today and, though similar, no two are alike. Several factors (parts) play a part in determining EIA policy design, and they include:

Participation Rate
Cap
Index Term
Renewal Option
Interest Crediting Method
Guaranteed Minimums
Yield Spread/ Margin Charges
Premium Loads
Surrender Charges and Surrender Period

See Definitions of EIA Terms

These are often referred to as moving parts because the issuing insurance company may have the ability to change these terms. Three critical components of an EIA that can move are: participation rate, yield spread (annual asset fee) and the cap.

For example, the policy may guarantee a participation rate for just one year, allowing the insurance company to adjust the rate in future years.

Likewise, the yield spread design typically allows the company to change the amount of the spread after one year. And the cap often can be adjusted after one year.

These moving parts are obviously used to protect the insurance company and are almost always used to the disadvantage of the policyholder.

All things being equal, the higher the participation rates, the more frequently the averaging will occur, the lower the cap, and the higher the asset fee, or vice versa.

Back to Main