How to Invest in Equity Indexed Annuities
An equity indexed annuity is designed to give investors a guaranteed rate of return while providing high returns when the stock market is doing well. While an equity indexed annuity is a suitable investment for some, it posses problems for others who may not fully understand how this annuity structure works. Investors who rely strictly on the advice of financial advisers risk investing in an equity index annuity when it isn't the suitable investment option. Understanding the product will help investors to not fall victim to someone only wanting to generate a large commission.
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Instructions
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Review your time horizon. Equity indexed annuities are considered long-term investments with long surrender periods (term durations the investor is required to hold the investment or pay a penalty for withdrawal). If you think you will need a large amount of income from the annuity within the next few years, chances are you should consider other, more liquid investments.
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Establish your risk tolerance. If you are averse to seeing your principal going down, but wish you could have gains when the market goes up, the equity indexed annuity is a solid option. If you don't mind seeing your principal fluctuate, you will prefer a variable annuity instead, where you will see uncapped returns when the market goes up--an indexed annuity mirrors the index it is associated with but caps returns to a fixed percentage.
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Choose whether you can make more in a fixed annuity. The minimum guarantee in an equity indexed annuity is not comparable to a fixed annuity return. You may average more over the course of the surrender period in a fixed annuity compared to the minimum guarantees in a fixed annuity.
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Contact your financial adviser or life insurance agent to obtain an equity indexed annuity application. Fill the form out and submit it with your premium payment--since this is an insurance product, contributions are called premiums. Product minimums start from $1,000.
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Tips & Warnings
Here is an example: Comparing $10,000 invested in a seven-year fixed annuity, earning a minimum of 5 percent, to the same $10,000 invested in an equity indexed annuity, with a minimum of 1 percent return, maxed out at 8 percent. If the market is down five out of seven years, with the last two years giving the maximum 8 percent, the fixed annuity would be worth $14,071. The index annuity would be worth only $12,258 after the seven years.
Equity index annuities do avoid probate, listing beneficiaries right on the contract. They do not avoid estate transfer tax nor do the beneficiaries avoid income tax when taking distributions.
