EQUITY INDEX ANNUITIES –
Equity Index Annuities (EIAs) came out in the early 1990s by insurance carriers to help compete with mutual funds. In the 1990s, mutual funds were very popular and the insurance industry needed to come out with a product that allowed for market exposure without the market risk.
EIA’s are credit interest based upon an index like the S&P 500 or the Dow. The selling point of these annuities is that they have zero market exposure. When the market goes up you proportion in the gains up to a declared cap. When the market goes down you get a zero. “Zero is my Hero” is better than a negative statement. Also, all past years gains are locked in and never go down.
Imagine playing the game of blackjack at a casino in Las Vegas. You play the max. Bet of $50 a hand. The first hand is played and you beat the dealer. Now you have $100 on the table. Now, the next hand comes out and the dealer beats you. Instead of the dealer taking your $100, you push and keep your $100 on the table to play again.
This is fleeting example of how an equity index annuity works. You proportion in the gains but none of the losses.
The EIA Guarantee
In addition to guarding your portfolio from market fluctuations, these products offer a minimum guarantee between 1-3%. Let’s say that you have a 5 year index annuity and the market is down 4 out of 5 years. Chances are you will get the min. guarantee. At the end of each contact you either get the higher of the account value or the min. guarantee and most companies can provide you min. guarantee illustrations.