The Equity Indexed-Annuity

Shawn Plummer

CEO, The Annuity Expert

An equity-indexed annuity is a type of fixed annuity that earns interest based on a portion of an equities index, typically the S&P 500. An index equity annuity is also known as a fixed index annuity.

Equity-indexed annuities appeal to many people, especially those who want some opportunity to earn a higher return than what’s available with traditional fixed-rate annuities but still want protection should things go wrong.

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How an Equity-Indexed Annuity Works

An annuity is an insurance policy for retirement with an insurance company. There is an accumulation period where the policy earns interest. At the end of the accumulation period, the investor has full control of the initial investment and earned interest. In addition, there is an optional payout period called annuitization.

Equity-indexed annuities provide a guaranteed minimum interest rate, typically 1% to 3% paid on 87.5% of your investment. This minimum interest rate applies if an investor earns no returns over the course of the contract. Thus, the primary method of earning interest is linked to the performance of an external equities index.

Earnings from index equity annuities are usually higher than traditional fixed-rate annuities, lower than variable-rate annuities, but with better downside protection than a variable annuity.

Earning Interest on Equity-Indexed Annuities

Indexed equity annuities offer a participation rate that can limit the extent to which the annuity owner can participate in market gains.

In exchange for limited profits, investors receive protection against downside risk, breaking even each year a down market occurs.

Some annuities have a cap on the total interest they can earn.

Annuities that use indexed funds (funds with changes based on market performance) have calculation formulas to measure performance. The annual reset formula looks at the index gains without considering any declines, which can benefit during “down years” in the stock market.

Equity-Indexed Annuities Disadvantage

The primary disadvantage of equity-indexed annuities is surrender charges. If the annuity owner decides to cancel the annuity, cancellation penalties can be high. In addition, accessing the funds before the age of 59½ will be subject to a 10% tax penalty.

Equity Indexed Annuities Pros and Cons

ProsCons
No Contribution LimitsLong-Term Contracts
Guarantee On InvestmentSurrender Charges
Tax-Deferred or Tax-Free GrowthAdditional Fees
Pass Down to BeneficiariesTax Penalties If Withdrawn Too Early
Spousal ContinuanceLimited Upside Potential
Stock Market Volatility ProtectionCaps and Rates Can Be Lowered
Guaranteed lifetime IncomeLimited Liquidity
Helps To Pay For Long-Term Care
Life Insurance Alternative

Equity Index Annuities

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At The Annuity Expert, we strive to help you make confident financial decisions regarding annuities. Content provided is created by an independent licensed financial professional.

The Annuity Expert is an online insurance agency that provides the widest variety of annuities in the United States. When you buy an annuity directly from us, we receive a predetermined commission from the insurance company (not you). While your annuity is active, clients are not charged any servicing or management fees. Learn more.

Shawn Plummer

CEO, The Annuity Expert

I’ve sold annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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