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Equity-Indexed Annuities For Growth & Safety

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Indexed AnnuitiesOur annuity clients come to us looking for safety and security. Major stock market corrections, unstable economic conditions, high inflation, bank failures war, and Covid among other concerns are on their minds. There are fewer places now to invest safely.

Brokerage accounts are fluctuating wildly and bonds prices have taken a major hit as interest rates have increased. Unfortunately, many investors were counting on those funds to provide income and stability during retirement. Now they are holding depreciated assets.

Equity Indexed Annuity Account Introduction

Designed to provide a greater return than a traditional fixed annuity, an equity indexed annuity can be a reliable alternative to a brokerage account. Several billion dollars have been deposited into these types of accounts as investors seek safety and the potential for above-average returns.

Investors should have a little background information if they are unfamiliar with annuities. Generally, an annuity functions in the following manner: The investor (usually called the annuitant or owner) agrees to deposit funds with an insurance company for a specified period of time, say 7 years.

The annuity is usually in deferral during that period of time. While in deferral, most annuities will allow for distributions of interest gains, a yearly 10% free withdrawal, and/or the required minimum distributions mandated by the I.R.S. (Many annuities allow for larger distributions if the owner is confined to a nursing home or is terminally ill.)

Another way to distribute annuity dollars is through systematic withdrawals (referred to as an annuitization) and it is based on an agreed-upon schedule, say 5 years, but can be set up for a lifetime.

If the owner decides to withdraw the entire contract as a lump sum before the annuity has matured, then penalties are accessed based on the surrender schedule in the contract. If the investor passes away, the lump sum of the annuity is paid to a beneficiary at passing unless other arrangements have been made.

Fixed Annuities with Indexing Interest Gains

Technically, equity-indexed annuities are characterized as fixed annuities by the various Departments of Insurance around the country. That is to say, at no point does the investor ever own any variable type of security like a stock, bond, or mutual fund within their account. These investments do not fluctuate in value like a variable annuity. Yet, an equity-indexed annuity is not like your typical fixed annuity either.

What makes EIAs different than a traditional fixed annuity is the way interest is credited to the account. Typically, the insurance company will buy an option in a chosen index like the DOW, S&P 500, or the NASDAQ. After a period of time, usually one year, the option contract comes due.

One of two things will then occur. If the chosen market index has advanced, the option is cashed in and interest is credited to the annuity principal. Conversely, if the market has gone down, the option expires and no interest is credited to the account for that year.

In practice, the annuity either gains or maintains value each year, but the investment cannot lose value due to negative market fluctuations. In this way, the investor is only risking their interest gains in any given year, but in no way is s/he exposing their principal or gains from years past to any downside risk.

It is also important to note that all EIAs have a minimum guarantee each year. For example, this guarantee might state that if the market declines every year over the life of the annuity, the insurance company will guarantee an interest payment of 1% on 90% of the premium deposited for example. However, it is practically unheard of for this safety feature to kick in as rates or returns normally far surpass these guarantees.

Investors should also know that most equity-indexed annuities have a fixed interest account as an additional investment option. When interest rates are high and the stock market is in decline, the fixed account might be used to credit interest to the annuity principal. In this high rate environment, some one-year fixed accounts are paying over 6% for the first year.

In practice, the owner can change their investment allocations each year between the indexing and fixed options provided by their chosen policy. Owners are not required to choose one account and allocate all of their funds to it each year or for the life of the annuity. Many of our clients allocate their principal to several different accounts within the same fixed-indexed annuity in order to hedge their positions.

Indexed Annuity History and Performance

What kind of gains might you experience investing in fixed-indexed annuities? You can compare a few of our best indexed annuity rates, caps and returns here. Historically many of these policies have averaged returns of 7% or better. In years when the broader markets have performed well, so have EIAs. Caps, spreads and participation rates are at historical highs. Some participation rates are above 500%!

It is not uncommon for investors to capture interest gains of 10-20% or more during bull market years. Indexed annuities, however, show some of their most crucial value in bear market conditions. EIAs do not lose principal or past gains when the market goes down. Few investments offer that guarantee.

These facts may explain the recent popularity of EIAs, especially among retirees looking to preserve a lifetime’s worth of hard work. With the market advancing and declining so rapidly, many consumers are looking for safety and security without having to sacrifice reasonable interest gains.

Granted, indexed annuities will not return 50% in one year, like a fortunate stock pick might, but the peace of mind investors gain knowing their investment cannot decline has many placing a portion of their retirement funds into these safe and reliable accounts.

Contact A Licensed Broker

At Hyers & Associates, we’ve been working with indexed annuity policies for over 25 years. Our independence allows us to present all options to our clients. Whether you’re looking for a short term 5 year policy designed for growth or a longer term indexed account with with an income rider, we can help. Contact us to today to compare the options that meet your investment needs.

Category: Annuities, Articles, Retirement Planning

Last updated on October 9th, 2023