How to Figure the Equity Indexed Annuity Interest Rate
Equity Indexed Annuities (EIAs) have become extremely popular in the past several years. As the volatility of the economy continues, it becomes more difficult to find retirement investments that offer safety and security but also an attractive rate of return. Equity Indexed Annuities do a good job of providing both safety and the potential for sizable gains. According to the Financial Industry Regulatory Authority (FINRA), "EIAs give you more risk (but more potential return) than a fixed annuity but less risk (and less potential return) than a variable annuity." Money invested into these products does not actually purchase any stock shares, but the value of the account is tied to a stock market index. Understanding how to calculate your rate of return is an important part of owning an Equity Indexed Annuity.
When you initially purchase an Equity Indexed Annuity, you choose one of several stock market indexes as the basis for your account's performance calculations. If the index performs well, your account value will grow. If the index performs poorly, your account value will remain unchanged. Money invested into Equity Indexed Annuities is never at a risk of loss because this type of annuity is technically a fixed investment where contributions are only invested in guaranteed fixed instruments.
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Instructions
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Examine your annuity statement. The value of most Equity Indexed Annuities only changes once per year, and most annuity companies only mail statements a few times annually. Locate the entry that lists the value of the index on your previous anniversary date.
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Determine the current value of your chosen stock market index. Even though most Equity Indexed Annuity companies only credit your account once per year on your anniversary date, you can estimate the growth in your account at any time by finding the value of your index.
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Calculate the percentage increase or decrease in your chosen market index by comparing its current value to the value listed on your annuity statement.
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Apply the index interest rate gain to your Equity Indexed Annuity value. The percentage increase in the stock market index is what the insurance company will add to your annuity value.
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Tips & Warnings
Most Equity Indexed Annuity products have interest rate caps. This is how the annuity providers protect themselves in the event of substantial earnings increase. The cap is the maximum interest rate increase that you can get, so if your chosen index has an increase higher than the cap, you forfeit the remainder. Review your annuity contract to determine the cap on your Equity Indexed Annuity.
