In order to understand how this works, it might be helpful to start by learning how a simple annuity works and then find out how such an investment account is pegged to an index. Once the basics are clear, it's not so hard to learn how to choose the best equity indexed annuities. Buyers just need to run things off on a checklist of factors such as the index, participation rate and a guarantee of a minimum rate of return.
An annuity is a financial product offered by an insurance company which enters into a contract with the buyer. This annuitant agrees to pay the insurer a lump sum amount or regular premiums. The insurance company in turn agrees to provide the buyer an income stream with regular payments that may start right away or at a future set date specified in the contract.
It obviously works great as a retirement plan account. The annuitant pays in a monthly premium out of his or her paycheck to build up the account, and then expects to be provided an income stream after retirement. Apart from the payment options (lump sum vs. Premium, deferred vs. Immediate, etc.), the way in which the contract is structured varies quite a bit in other ways too.
It could be an individual or group contract, and the interest rate offered during the accumulation period may be fixed or variable. The fixed type offers returns at an interest rate specified in the contract. The exact dollar amount of the premiums that the annuitant must pay in is also specified. Variable contracts offer returns that will vary based on the performance of the underlying investments into which the premiums are invested.
The interest earned by investment accounts such as annuities can also be pegged to an index. The exact choice varies based on the financial product in question, but it could theoretically be anything from a commodity index to one for stocks. As far as an annuity is concerned, the best option would be an equity index such as the Russell 2000 or the S&P 500.
An EIA buyer should be looking at a few specific factors to choose the right annuity. The index to which the growth is linked is obviously of paramount importance. But the method the insurer uses to track the chosen index is just as important.
For example, some insurers use a point to point system where the rate is adjusted at a couple of key dates, such as the start date and then at maturity. If the index rises up and stays at a high level in the interim before coming down again to where it was by the time the annuity accumulation period ends, then the annuitant loses out on a lot of earnings. It is, therefore, extremely important to choose a product and provider that tracks the index closely and as frequently as possible.
The minimum guaranteed rate of return is another important point. If such a guarantee exists in the contract, then the insurer must pay interest at this level even if the indexed returns fall below it. The reverse may also hold true, with the insurer specifying a cap on the maximum rate of returns. For instance, many companies commonly limit interest rates at in between three to eight percent.
An annuity is a financial product offered by an insurance company which enters into a contract with the buyer. This annuitant agrees to pay the insurer a lump sum amount or regular premiums. The insurance company in turn agrees to provide the buyer an income stream with regular payments that may start right away or at a future set date specified in the contract.
It obviously works great as a retirement plan account. The annuitant pays in a monthly premium out of his or her paycheck to build up the account, and then expects to be provided an income stream after retirement. Apart from the payment options (lump sum vs. Premium, deferred vs. Immediate, etc.), the way in which the contract is structured varies quite a bit in other ways too.
It could be an individual or group contract, and the interest rate offered during the accumulation period may be fixed or variable. The fixed type offers returns at an interest rate specified in the contract. The exact dollar amount of the premiums that the annuitant must pay in is also specified. Variable contracts offer returns that will vary based on the performance of the underlying investments into which the premiums are invested.
The interest earned by investment accounts such as annuities can also be pegged to an index. The exact choice varies based on the financial product in question, but it could theoretically be anything from a commodity index to one for stocks. As far as an annuity is concerned, the best option would be an equity index such as the Russell 2000 or the S&P 500.
An EIA buyer should be looking at a few specific factors to choose the right annuity. The index to which the growth is linked is obviously of paramount importance. But the method the insurer uses to track the chosen index is just as important.
For example, some insurers use a point to point system where the rate is adjusted at a couple of key dates, such as the start date and then at maturity. If the index rises up and stays at a high level in the interim before coming down again to where it was by the time the annuity accumulation period ends, then the annuitant loses out on a lot of earnings. It is, therefore, extremely important to choose a product and provider that tracks the index closely and as frequently as possible.
The minimum guaranteed rate of return is another important point. If such a guarantee exists in the contract, then the insurer must pay interest at this level even if the indexed returns fall below it. The reverse may also hold true, with the insurer specifying a cap on the maximum rate of returns. For instance, many companies commonly limit interest rates at in between three to eight percent.
About the Author:
You can visit www.russellward.info for more helpful information about Finding The Best Equity Indexed Annuities.
