What Are Equity Index Annuities?

There is a new class of annuity that provides a portion of the Standard & Poor’s 500 stock index performance with a no-loss provision. It is known as the equity index annuity. This new type of annuity is not a security, as you might suspect, but it is classified as a single-premium traditional annuity. It is an annuity because it meets the strict insurance department requirements for interest guarantees and guarantees against loss of principal, and it provides traditional annuity benefits. Let’s look at what makes this such an attractive savings option.

No-Loss Provision
The first and possibly most-attractive provision of equity index annuities is the no-loss provision. This means that once a premium payment has been made or interest has been credited to the account, the account value will never decrease below that amount. This provides safety against the volatility of the S&P 500.

Interest Guarantees
The next benefit that appeals to many people is interest guarantees. Most policies have a cap (the maximum interest rate that can be credited to a policy in a policy year) and a floor (the minimum interest rate that can be credited in a policy year). The cap rate can vary from no cap to a fixed percentage, but the floor is generally zero. This allows the policyholder to benefit from potentially high returns and be guaranteed at the same time that no money will be lost.

Competitive Rates of Return
With concerns over inflation and making sure that investments will meet our future needs, many people have turned to the equity market for higher returns. It makes sense when you consider how well the S&P 500 index has performed historically.

Traditional Annuity Benefits
Equity index annuities offer the same benefits as traditional annuities. Notable among these are tax-deferred growth and early withdrawal of funds without penalty. This early withdrawal is usually conditioned upon the annuitant’s death or admittance to a nursing home.

Note that most annuities have surrender charges which are assessed in the early years of the contract if the owner surrenders it before the company has had the opportunity to recover its costs. The earnings portion of withdrawals are taxable as ordinary income and, if made prior to age 59 ½ are subject to a 10 percent penalty.

Equity index annuities typically offer other benefits that are not generally included in traditional policies: a 100 percent money-back guarantee, no front-end sales charges, and no annual management fees or administrative fees. However, equity index annuities can contain mortality and expense charges, cost-of-insurance charges, and administrative fees. Equity index annuity values fluctuate with changes in market conditions.

Overall, equity index annuities are single-premium annuities that are performance-linked to the S&P 500 stock index. They guarantee security of principal and credited interest, and many don’t have a cap on earnings. When you consider the performance of the S&P 500, these annuities look even better.

Guarantees are provided by the issuing insurance company. The Standard & Poor’s Composite Index of 500 stocks is generally considered representative of the U.S. stock market. The performance of any index is not indicative of the performance of any particular investment. Individuals cannot invest directly in any index. Past performance is no guarantee of future results.

© 2003 Emerald Publications

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