Tell Me About Equity Indexed Annuity Products

Sales of equity-indexed annuities (EIAs) have grown considerably in recent years. An equity-indexed annuity allows you to benefit from potential gains when the stock market is up, but also prevents you from being penalized when it's down. So even if the stock market were to decline in value, your contract value can never decline. In addition, like all fixed annuities, you're protected by a lifetime guaranteed minimum interest rate.

EIAs have characteristics of both fixed and variable annuities. EIAs offer a minimum guaranteed interest rate combined with an interest rate linked to a market index. The guaranteed minimum return for an EIA is typically 90% of the premium paid at a 3% annual interest rate. However if you surrender your EIA early, you may have to pay a significant surrender charge and a 10% tax penalty that may reduce or eliminate any return.

Although insurance companies use the word "simple" in the name of their equity indexed annuity product, in reality EIAs are anything but easy to understand. The method used to calculate the gain in the index to which the index annuity is linked is very confusing because there is not one but several different indexing methods.

Your guaranteed return is only as good as the insurance company that gives it. While it is not a common occurrence that a life insurance company is unable to meet its obligations, but it happens. So before you buy an EIA, you should understand the various features of this investment and be prepared to ask your insurance agent, broker, financial planner, or other financial professional lots of questions about whether an EIA is right for you or not.