How to Set Up an Equity Indexed Annuity

An equity indexed annuity is connected to an equity index or stock, and the interest earned is dependent on the market performance of that stock or index. Your account is credited with interest when there is a change to the index or stock.

Difficulty: Easy

Instructions

Things You'll Need:

• Funds to pay premium

Set up an Equity Indexed Annuity

1. See a professional before you set up this type of annuity. This annuity is one of the most complex in the way it calculates earnings. Working with someone who can explain the process to you is wise.

2. Be aware that some equity indexed annuities are saddled with surrender periods the last 10 years. They are not for older people who may need to surrender their annuities sooner.

3. Review your contract carefully, as the insurance company may have the ability to change major facets of the annuity, affecting your return.

4. Expect that insurance companies may cap your earnings during the year. Find out the maximum earnings allowable before you set up your annuity.

5. Complete your application or other paperwork with your insurance agent to ensure that you do not make costly mistakes.

6. Purchase "Equity-Indexed Annuities: The Smart Consumer's Guide" by Jay Adkisson at Amazon.com to find out more information on equity indexed annuities (see Resources below).

Tips & Warnings

• Get to know the facts about value increases. Although the equity indexed annuity depends on the market to determine increases in value, there is still a minimum return on earnings that is guaranteed when you purchase your contract.
• The equity indexed annuity has a significant amount of fees that must be considered by the annuitant. Understand these fees before you make your initial contribution.
• Carefully consider your risk. Although many insurance companies guarantee that you will get a return of at least 90 percent of your principle and additional interest of about 3 percent, you can still lose money by purchasing this riskier annuity.
• Do not choose an equity indexed annuity if you think you will have to withdraw funds before you are 59 1/2 years old. Substantial federal-tax penalties (10 percent) plus additional tax liabilities may result from your surrender of the annuity.

Resources

• Information on Equity Indexed Annuity