What is an 'EIA' or 'FIA' Annuity?

Equity-Indexed Annuities ('EIAs') are also known as Fixed Indexed Annuities ('FIAs') or more simply, as "index annuities". This unique product was created in the late 1990s by insurance companies as a creative way to outpace current interest rates. Rather than crediting interest based on the U.S. T-Bond for example, your interest is instead based on the performance of a stock (equity) index, usually the S&P 500 index. However, unlike its cousin the variable annuity, an indexed annuity is not a security. Your deposit is never vulnerable to stock market losses.

Index annuities offer features attractive to many retirees:

• Guarantee of original deposit
• Increasing value based on stock market index
• Tax-deferred growth
• Choices for ways of receiving income

In short, you have your cake and eat it too. But let’s look closer to help you discern good from not so good.

Every index annuity has a “participation rate.” This is the percentage that you share in an increase in the stock market. For example, a hypothetical index annuity based on the S&P 500 index with a 50% participation rate would provide a return of 5% if the S&P index rose 10%. Why would an investor give up half of the return from the market? Because if the market declines, you do not lose money as your original principal is guaranteed. So this arrangement is quite attractive for investors seeking to protect their principal in return for a higher interest rate.

But you need to decide whether to choose an annuity that has a guaranteed, fixed participation rate for the entire term of the contract - or a rate that the company can adjust up or down each year. Locking in your rate over the entire term can sound attractive, but if you lock in when going rates are low, if rates were to climb you would miss out on that benefit. Is the full-term rate guarantee worth giving up possible future increases? The answer largely depends on your stock market outlook. Will the market be better, worse, or about the same in ten years, than it is today?

The other issue to look out for is “averaging” of the S&P index. Many index annuities provide a participation rate based on the “average” increase in the S&P 500 index. This typically means that the S&P 500 index is measured once per month. These figures are summed and divided by 12 to produce an average closing figure. The gain for the year is measured based on this averaged figure. Studies of index annuity returns over the past 30-40 years shows that averaging reduces the investor’s return. So all else being equal, you would prefer no averaging in your index annuity (past performance is not an indication of future results).

There are other features to consider, including an annual reset feature, deductions or fees, forced annuitization and potential surrender charges. Like most investments that seem simple on the surface, index annuities have important features that you must understand. Please contact us and talk to our Certified EIA Specialist for more information to understand how you could profit from stock market increases while having your original principal protected.

(Note: If there is no increase in the S&P 500 during the designated term, investor receives only the minimum guaranteed rate minus expenses. Withdrawals during the vesting period may cause any and all gains not to be realized. Guarantee is subject to claims paying ability of the insurance company. The S&P 500 is an unmanaged index that cannot be invested in directly.)

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