If you are considering buying or purchasing an equity-indexed annuity, this will explain what equity-indexed annuities are and provide resources for obtaining additional information. It provides a good understanding for thebeginner and a basic review for the more experienced investors.

What is an equity-indexed annuity?

An equity-indexed annuity is a special type of contract between you and an insurance company. During the annuity accumulation period, when you make either a lump sum payment or a series of payments, the insurance company credits you with a return that is based on changes in an equity index, such as the S&P 500 Composite Stock Price Index. The insurance company typically guarantees a minimum return. Guaranteed minimum return rates vary. After the accumulation period, the insurance company will make periodic payments to you under the terms of your contract, unless you choose to receive your contract value in a lump sum.

Can you lose money buying an equity-indexed annuity?

You can lose money buying an equity-indexed annuity, especially if you need to cancel your annuity early. Even with a guarantee, you can still lose money if your guarantee is based on an amount that’s less than the full amount of your purchase payments. In many cases, it will take several years for an equity-index annuity’s minimum guarantee to “break even.”

You also may have to pay a significant surrender charge and tax penalties if you cancel early. In addition, in some cases, insurance companies may not credit you with index-linked interest if you do not hold your contract to maturity.

What are some of the contract features of equity-indexed annuities?

Equity indexed annuities are complicated products that may contain several features that can affect your return. You should fully understand how an equity-indexed annuity computes its index-linked interest rate before you buy. An insurance company may credit you with a lower return than the actual index’s gain.

Some common features used to compute an equity-indexed annuity’s interest rate and return include:

Another feature that can have a dramatic impact on an equity-indexed annuity’s return is its indexing method (or how the amount of change in the relevant index is determined).

Some common indexing methods include:

Before you decide to buy or purchase an equity-indexed annuity, you should understand how each feature works and what impact, it may have on the annuity’s potential return.

Are equity-indexed annuities registered with the Securities and Exchange Commission?

Equity-indexed annuities combine features of traditional insurance products (guaranteed minimum return) and traditional securities (return linked to equity markets). Depending on the mix of features, an equity-indexed annuity may or may not be a security. The typical equity-indexed annuity is not registered with the SEC.