What You Should Know About Equity Indexed Annuities
In recent years the indexed annuity annuity has become a popular investment vehicle. Here's a look at what you need to know about equity indexed annuities.
There is a difference in equity indexed annuities and other forms of annuities. An equity indexed annuity is characterised by its credit interest that is added to the annuity value. A fixed annuity has a fixed rate that is used to calculate the amount of interest. The equation for calculating an equity indexed annuity takes into account changes attributed to the annuity.
The similarity between a fixed annuity and an equity indexed annuity is that both allow for payment of the minimum rate. The rate applied on the equity indexed annuity is never below the minimum regardless of the position of the index linked interest rate. Most companies will not protect your annuity from sliding below the minimum.
The equity indexed annuity has many features. There are two types of features that affect the additional interest. The first feature is the way of indexing, and the second feature is the participation rate. It is important to know how these features change your credit interest.
The way of indexing is a method of calculating the changes in the interest rate for the index.Sometimes, changes may not occur for several reasons.Ratcheting is one method of calculating the changes. Two other methods used are the high water mark and the point to point system.
Lastly, equity indexed annuities are affected by the participation rate. The changes in the index for the participation rate are used to calculate the index linked interest. A certain percentage of the increase is used is applied to the formula: Let X=index increase=participation rate. The index linked interest rate is calculated as follows, I=(X) x (Y).The result I, is the index linked rate. The company that manages your investment will decide on the value of the participation rate. Participation rates may change on the date they are introduced.
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When it comes to equity indexed annuities things can get complicated in a hurry. As a result it is highly recommended that you have a good understanding of equity indexed annuities prior to investing.