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Equity Indexed Annuity

An index annuity (the word equity previously tied to Indexed Annuities has been removed to help prevent the assumption of stock market vesting being present in these products) in the United States is a type of tax-deferred annuity whose credited interest is linked to an equity index — typically the S&P 500 or international index. It guarantees a minimum interest rate (typically between 1% and 3%) if held to the end of the surrender term and protects against a loss of principal. An equity index annuity is a contract with an insurance or annuity company. The returns may be higher than fixed instruments such as CDs, money market accounts, and bonds but not as high as market returns. Equity Index Annuities are insured by the State Guarantee Fund which is similar to the insurance provided by the FDIC. The guarantees in the contract are backed by the relative strength of the insurer.

What it Protects Against?

In the accumulation phase, it protects against loss of capital due to market decline. In the distribution phase, it protects against diminishment or loss of income.

How It Works?

 Particularly well suited for people near or in retirement who cannot afford to lose money due to stock-market declines. In taxable accounts, these products provide tax deferral that should reduce annual taxable income, a feature especially useful to those in high tax brackets. The product can be converted through the annuitization option to a reliable stream of income that lasts a lifetime and can be of great value to people without pensions.

Who May Not Need It?

People in low tax brackets or people with money