Revisiting
Equity-Indexed Annuities
By
the end of 2004, sales of equity-indexed annuities (EIAs) are expected to reach
about $17 billion, up from $14 billion in 2003.¹
Experts
say the rise in EIA sales corresponds to the rise in the stock market. As stock
prices improve, investors may want to participate in wealth-creation
opportunities. EIAs may be just the type of risk-managed financial vehicle that
many investors can use to round out their
retirement plans.²
Best
of Both Worlds
EIAs are fixed annuity contracts that offer returns tied to a market index, such
as the S&P 500. They offer the potential for index-type returns but feature
a minimum return rate guarantee like traditional fixed annuities.³
Typically,
EIAs include a no-loss provision, which means that once a premium payment has
been made or interest has been credited to the account, the value of the account
cannot decrease below that amount.
In the event that the index to which the annuity is tied underperforms or
experiences a loss, the worst it can do is earn the contract's minimum
guaranteed rate of return. Finally, EIAs also offer the potential for
tax-deferred accumulation.
Complicated
Calculation
EIAs are not appropriate for every investor. Participation rates are
set and limited by the insurance company. So an 80 percent participation rate
limit means that only 80 percent of the gain experienced by the index for that
year would be credited to the contract holder. Also, like most annuity
contracts, EIAs have certain rules, restrictions, and expenses.
An EIA
can be an important vehicle to consider for those who like the outlook for the
financial markets, yet want to manage their risk. Please
call if you would like to determine whether EIAs are appropriate for your
current financial situation.
1) The
Wall Street Journal, June 15, 2004
2) Most annuities have surrender charges that are assessed during the early
years of the contract if the contract owner surrenders the annuity. In addition,
if you surrender the contract before age 59½, you may be subject to a 10
percent federal income tax penalty.
3) The guarantees of fixed annuity contracts are contingent on the claims-paying
ability of the issuing insurance company.
