An individual can make an investment in a contract between that individual and an insurance company, this is what is known as an equity indexed annuity. The investor can either put forth a lump sum or choose a long period of regular payments in order to receive return payments upon retirement.
What is an Equity Index Annuity?
For investors looking for options in a low interest environment, an equity indexed annuity can be an optimal choice. These types of annuities are investment opportunities put on the market by insurance companies. Investors who like to play in the stock market but don't want to risk their hard-earned money can utilize this option. The worst case scenario associated with equity indexed annuities is coming away with lesser rates of interest than offered, the principal is never disrupted.
One can find equity index annuities in Dow Jones Industrial Average, S&P 500 and a variety of other common stock market indexes. These annuities have all the features of what an investor tends to see in insurance products with the added security they tend to carry. The minimum return rates attached to equity index annuities will vary from contract to contract.
Who Should Invest?
If a person is still twenty or thirty years away from retiring an equity indexed annuity can be a great choice for his future retirement plans. He will have those two or three decades to grow his investment and see the money flourish with the economy, the investor could end up with more in the end than he would with other investments traditionally considered "safe bets." If one is a scant few years from retirement it will be better to consider an equity indexed annuity that features a fixed interest rate.
What is Participation Rate?
Most often annuities linked to equity carry a participation rate with them, this will limit how much of a market gain the annuity holders can gain. Say that a contract carries a 60% participation rate, if the S&P is bumped up another 20% that annuity holder will gain 12%. At the same time, the investor is given a loss limit, this can often ensure that the worse the investor will do is minimized every calendar year. Considering that the market fell a whopping 38% in 2008 the returns of annuity investors look pretty good comparatively.
Some equity indexed annuities may not work out in the end, especially in the event the investor wishes to cancel on their contract too early. Contracts tend to carry surrender charges and there will be tax penalties as well. A smart investor should make themselves aware of every aspect of indexed interest and how it is credited.
Reference: www.money-zine.com, site viewed on 6 Feb,2010
Unnikrishnan k - I am a 25 year old freelance writer, graduated in Electronics Engineering . I have been writing for last on year for Digitaljournal and ...
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