Taking advantage of markets with equity indexed annuities
There are a variety of types of annuities. Examples of these include CD type annuities, equity indexed annuities and fixed annuities. Here we take a look at the annuity that is equity indexed.
This kind of annuity is defined as, “An annuity that earns interest and is linked to a stock or an other equity index.” Think of it as an annuity that is able to offer the purchaser a guaranteed minimum return rate. One of the most commonly used indices is known as the S & P 500 (or the Standard & Poor’s 500 Composite Stock Price Index).
An equity indexed annuity is a type of fixed annuity but it has its differences from other kinds of fixed annuities. Interest is credited to the annuity’s value. On the other hand, most fixed annuities credit interest that is calculated at a rate that is set in the contract that is drawn up. In the case of equity annuities of this type interest is credited by the use of a formula that is based on modifications in the index to which the annuity happens to be connected to.
The formula used makes the decision about how additional interest (if there is any) will be both calculated and credited. It is the specific features of the annuity that determine how much extra interest you will be entitled to and when you will receive it.
As previously stated, a minimum interest rate is something you get with these kinds of annuities. The interest rate that will be applied to the annuity will never be less than the minimum guaranteed rate even if the interest rate that is index-linked happens to be lower. In the same way the annuity’s value will not decrease below a guaranteed minimum rate.
Two of the features that tend to have the greatest effect on how much interest is created to an equity indexed annuity include the indexing method and the participation rate. Let us consider both of these features.
The indexing method refers to the approach that is used to measure how much change if any has taken place in the index. There is more than one indexing method. The most common indexing methods include annual reset (ratcheting), point-to-point and high-water mark.
The participation rate is the determining factor in how much increase will take place in the index that is used to calculate the interest that is index-linked. It is within the rights of a company to choose a different participation rate for equity indexed annuities that have just been issued as often as every day or every other day.
