Are Equity Indexed Annuities Right For You?

Last month I wrote in defense of the best, most secure financial product ever conceived... The Annuity. Now, I want to expand on that discussion by focusing on what I consider the best of the lot: The Equity Indexed Annuity. Sometimes called the Fixed Indexed Annuity, these instruments have some very special features that should call the attention of all people at or near retirement.

Equity Indexed Annuity are a hybrid product, developed by insurance companies to allow for higher yields than the traditional Fixed Annuities, without the potential stock market losses attendant in Variable Annuities. Let's look at each of these separately and then discuss the FIA.

Fixed Annuities earn a guaranteed interest rate during a certain period. They are backed by assets in an insurance company's general account, usually bonds. Fixed Annuities depend entirely on the financial soundness of insurers, which are regulated primarily by state insurance departments.

Variable Annuities can also come with guaranteed benefits, such as a death benefit and a minimum return, but you must pay extra for these features. Once the cost of fees and riders is deducted, the balance of the deposit is invested in a portfolio of mutual fund-like investments. Therefore, variable annuities are more exposed to market risks. In market downturns, owners of VAs can see their balances evaporate. So what is the solution? Do you have to take risks in the market in order to get higher yields? Enter the EIA!

Equity Indexed Annuities are hybrid vehicles that allow you to preserve your capital like a FA, but also allow you to participate in market growth when the markets go up like VAs. In other words, your account values in EIAs only go UP, NEVER DOWN. And, you have the ability to earn up to 3% per MONTH with some contracts! So, when markets are up, you participate on the upside. When markets are down, your capital is preserved and you lose no money. Does this sound too good to be true? Well, it isn't.

Insurance companies are willing to enter into these contracts because they only allocate a portion of the market gains to your account, keeping the rest for themselves. This is a spread they earn on your deposit. For this money, they guarantee that your account balance will never go down, even in bad market years. So, the EIA gives you the best of both worlds, market participation when markets are up, and capital preservation when markets are down.

To see if EIAs should have a place in your financial plan, give us a call at (702) 240-4621 to schedule an appointment.