As fixed equity indexed annuities become increasingly popular, I think it’s important to share some of the more basic information that I just found in “What you need to know about equity indexed annuities.” Eric Taitz of Long Island’s Sayville-Bayport Patch explains how this contract with an insurance company works. Using either a lump sum payment or multiple payments to an insurer, you will buy your fixed indexed annuity and earn interest based on the performance of a predetermined stock market index. In an increasing stock market, your interest rate will grow, but if the stock market declines, you will still receive a guaranteed minimum interest rate and won’t lose any of your principal. This is as long as you follow the terms of your contract.
The participation rate associated with your equity indexed annuity is the percentage of any stock market gain that you will receive as an interest rate increase. We recommend participation rates around 90%, but when comparing fixed equity indexed annuities, you may agree to sacrifice a higher participation rate based on other positive factors the annuity offers. There are different ways to calculate the changing index including taking the interest rate at the start and end date of your annuity contract to figure out any gain or loss. You may also use an averaging method, calculate the changes on anniversary dates, or use the year-end differences to determine any interest rate gains over the term of your equity indexed annuity.
Interest can be credited yearly or just at the end of your term. Some annuities use compound interest calculations and others pay simple interest. Speak with an expert to see how the different interest crediting methods may affect you. You have a better chance of earning at least some interest if you are credited yearly, rather than at the end of the term. Surrender charges can be high with fixed indexed annuities; as with any annuity, it is best to leave your money untouched throughout the surrender charge period. There may be a cap on your interest rate of a certain percentage, so you won’t get higher than that percentage even if the index performs better. Any added asset fee, spread, or margin would be deducted from your potential interest rate gain, so go over your prospectus carefully before purchasing. Regardless, fixed equity indexed annuities are popular now because they not only offer a potential for stock market gains, they also protect your money from losses.
Written by Rachel Summit
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