Equity annuities offer a good way to manage retirement risk. Equity annuities provide potentially high investment returns without the fear of losing principal, as is the case with traditional investment products. Equity annuities work by placing most of the premium into a fixed annuity plan and putting the remainder into equity-index call options. State insurance regulators consider equity annuities to be fixed annuities.
Equity Annuities and Indexing:
Indexing refers to linking the credited interest rate of an equity annuity plan to an equity index, such as NASDAQ or Standard & Poor’s 500 Stock Index. The principal amount is never at risk, since the linking exists only between the stock index and the credited interest rate. Therefore, market downturns will not negatively impact assets held in an equity annuity plan.
Equity annuities are also known as equity-indexed annuities. The major difference between these plans and other fixed annuity plans is the method used to credit interest to the annuity funds’ value. Generally, fixed annuities determine interest on the basis of a rate set in the annuity contract. Equity annuities determine the interest rate by using a formula reflecting the ups and downs in the index to which the plan is linked. The actual amount of interest depends on the features of the annuity plan.
Equity annuities work like other fixed annuities. They guarantee payment of a minimum interest rate, which applies even if the rate linked to the stock index is lower. This means that equity annuities are suitable for individuals who want to obtain the highest gain with as little investment risk as possible. If stocks rise in value, equity annuities also gain, but if stocks fall, the plans do not experience any losses.
Equity annuities are relatively new and were introduced between 1999 and 2002. They have grown in popularity because they offer benefits similar to more traditional annuity plans, including tax deferral, guaranteed minimum interest rate, and security of the premium, while being more reliable than brokerage accounts.
Performance of Equity Annuities:
Historically, equity annuities have provided returns of seven percent or more, on average. When markets do well, equity annuities do well, and in good years, interest payments may range between ten percent and 20 percent. The value of an equity annuity is obvious in bad years – they maintain their principal and the earnings obtained in previous years in spite of a market downturn.
These plans are appropriate for retirees who want to have secure investments with the potential for achieving high returns. Equity annuities can offer retirees some peace of mind because they can rest assured that their investment value will not decrease.
Author Resource:-
For more information from Steven on how to invest in annuities and common investment mistakes, visit his Annuities Investment Guide. To learn more about the differences between fixed and variable annuities, visit the Fixed Annuities or Variable Annuities Guides.
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