Up until about 15 years ago, there were only three primary types of deferred annuity products: traditional fixed, multi-year guaranteed or variable annuities. Traditional fixed and multi-year guaranteed annuity products offered steady, respectable interest rates, which were attractive to some, but not attractive to those who wanted the opportunity for a more competitive interest rate return. With variable annuities, there is a possibility of larger returns if the market is doing well, but in the event of a market nosedive, you stand to lose previous earnings and even the original premium deposit. Insurance companies, seeking an in-between product, introduced the equity-indexed annuity in the 1990s. An equity-indexed annuity combines the safety of a guaranteed fixed annuity product with the potential of higher-than-average returns of a variable annuity. These hybrid products, also called fixed-indexed annuities, have gained in popularity and in 2006, represented about 30% of all fixed annuity sales.

Equity-indexed annuities are deferred products; you will not receive regular income payments from the annuity until you elect a systematic withdrawal benefit or annuitize the contract, and all interest earnings within the annuity are tax-deferred until withdrawn. Your premium, which you pay to fund the annuity, is never invested directly in the stock market, like it would be in a variable annuity. Instead, the issuing insurance company credits interest to your account using an indexing method, which measures the amount of change in the particular market index an equity-indexed annuity is tied to. For example, a majority of equity indexed annuity products are linked with Standard & Poor’s 500 Composite Stock Price Index. Using the common point-to-point indexing method, the interest credited is based on the percentage change between the market index value at the beginning of the crediting term and the end of the term. A crediting term usually consists of one year increments, with the start and anniversary dates being the same as the annuity issue date.

Does this mean if the market is doing poorly over a long period of time that your annuity is earning zero interest? No, because equity-indexed annuities offer a guaranteed minimum interest rate, usually between 1-3%. Most equity-indexed annuities also feature caps, which set an upper limit on the amount of interest you can earn. For example, if the crediting method shows a 12% return, and you have a 10% cap, you will be credited 10% in interest earnings. However, the tradeoff for the cap is the peace of mind in knowing you’ll never lose any of your principal or previously credited interest earnings due to a volatile market.

Would you like to discover how an equity indexed annuity might fit into your retirement portfolio? There are a variety of resources online that can explain equity-index annuities in-depth. Visit www.AnnuityForLife.com or call their Annuity Specialists at 1-888-261-6237 to learn more about equity-indexed annuity products.