Are Equity-Indexed Annuities Riskier?
Equity-indexed annuities are fixed annuities designed to offer market index-linked growth potential. Insurance providers that offer these contracts employ various strategies in order to track and credit gains over time.
These strategies could include caps or participation rates that limit how much gain you receive or only allow a specified percentage of index growth to be credited back into your account. All gains will remain tax-deferred until they’re withdrawn during retirement.
How do they work?
Like other fixed annuities, equity-indexed annuities offer potential returns that track market index performance. These indexes may be standard benchmark indices or customized ones designed to minimize volatility risk or pursue other goals such as noncorrelation with major equity indices. Tracking methods vary among annuity providers – some use point-to-point to credit interest even if the index has dropped while others may exclude dividends altogether.
These annuities often offer a minimum guaranteed rate ranging from 1-3% that will apply even if an index fails to rise, along with caps and participation rates which limit how much of those gains an investor receives – these features make these investments attractive among investors looking for low risk with little tolerance for market fluctuations but with an interest in fixed annuity appeal.
Are they riskier than traditional annuities?
Equity-indexed annuities (EIAs) combine the low risk attributes of fixed annuities with the opportunity for market-linked returns, but your return will depend on which features and fees your annuity entails.
Example: Your EIA’s participation rate determines what proportion of index-linked gain the insurance company credits towards your contract. For instance, if the index linked to your annuity makes 15% profit and its participation rate was set at 80% – you would only get back 6.4% of it (80% of index linked profit).
Other fees that can reduce an index-linked gain include spread/margin or asset fees. Some annuities also impose caps or floors on index-linked interest rates.
Are they a good investment?
Index annuities provide a great way to secure interest that’s tied to the market; however, they have some key drawbacks. They generally limit maximum index-linked interest rate with caps or floors; also, reinvested dividends which make up a substantial part of market index returns may not be included as part of your market index return return.
Additionally, these contracts may incur significant surrender charges should you withdraw funds prior to turning age 59 1/2 and withdraw them early. These costs can significantly diminish any potential earnings you might see from these policies.
However, equity-indexed annuities may provide you with attractive returns when used correctly as part of a retirement savings plan. It’s essential that you read all of the fine print carefully in order to understand any restrictions placed upon these contracts and ensure their best use in your retirement savings plan.
Are they a bad investment?
Equity-indexed annuities offer high returns; however, they do come with certain restrictions. One such restriction is often an index return cap that limits potential earnings; moreover, equity-indexed annuities don’t typically take dividends into account in their calculations of index returns, which could negatively impact performance over time.
Keep in mind that index-linked annuities may impose participation rate, volatility control index and spread/asset/margin fees which could reduce the total amount of indexed interest earned. Therefore, it’s wise to carefully read any annuity contracts and seek advice from an independent financial professional without commission incentives for selling these products.
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