What Is An Equity Indexed Annuity

An Equity indexed annuity is a type of annuity that derives its earnings from stock indexes. This earning is in the form of interest. The Standard and Poor’s 500 index is a composite stock price index that is commonly used.

An equity indexed annuity is not like other fixed annuities. The main difference between an equity indexed annuity and other types of annuities is that your interest is credited to the value of the annuity. The characteristic of many fixed annuities is that interest for the contract is credited at rate fixed in the contract agreement. The formula for used for calculating credit interest for an equity indexed annuity is based on changes linked to the annuity. This formula takes several factors in determining the credit interest. The credit interest an investor gets varies depending on the features of the annuity.
Just like a fixed annuity, the equity indexed annuity provides room to pay the lowest interest rate. The rate used will be more than this lowest rate regardless of whether the index-linked interest rate is lower. The value of your annuity is protected. It will not go down below the guaranteed minimum.

There are several other features of the equity indexed annuity.Mostly, you will find two features that have a great impact on the credit interest. These are the method of indexing and the participation rate. If you are an investor, you must understand these features and how they affect the additional interest. Equity indexed annuity features affect the formula used in calculating the credit interest.

The method of indexing is a way of assessing the amount of changes in the index. There can be no changes at a particular instance, and in this case, no changes will affect the formula. The most popular methods of indexing are the ratcheting, point to point, and the high water mark.

The second method of indexing that affects the equity-indexed annuity is the participation rate. In the participation rate method, the percentage increase in the index is used to determine the index linked interest. This increase is dissected into several components that are applied to the index linked interest. As an example, let’s say the percentage increase is 10%,and the rate of participation is set at 80%.In order to calculate the index linked interest rate, the formula will produce results as follows: (10% x 80%=8%).The participation rate depends on the company. New annuities may have a different participation rate. The participation rate may change on a daily basis. Your initial participation rate will also therefore depend on the date it was introduced. The participation rate may be guaranteed by the company. The guarantee term may range from 12 months and above. The rate will expire after the the guaranteed term and a new rate will be introduced. Certain annuities promise not to set the participation rate lower than a specific minimum or higher than a specific minimum

By: FrankRod

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It's important to note that the equity indexed annuity comes in many variations. All of these different equity indexed annuity variations are no created equal, so proceed with extreme caution when it comes to investing in these indexed products.