What is an Equity-Indexed Annuity?

    In the past few years, a new breed of deferred annuity has become very popular: the Equity-Indexed Annuity. Like other fixed-rate annuities, the equity-indexed annuity offers safety of premium, tax deferral, and a minimum interest rate guarantee. Unlike other fixed deferred annuities where the insurance company declares an interest rate for one or more years, with an equity-indexed annuity, the interest earnings are determined based upon the growth in an accepted equity index, such as the S&P 500 Index.

    There are many different formulas available to calculate the index growth, including calculating averages in index changes or simply calculating point-to-point changes in the index. Most of the current equity-indexed annuities use growth in the S&P 500 Index to determine the crediting rates. However, there are certain equity-indexed annuities which use the Dow Jones Industrial Average, the Russell 2000 or other indexes instead of the S&P 500 Index. In addition to tax deferral, equity-indexed annuities also offer safety of your premium.

    Equity-indexed annuity contracts offer a current interest rate linked to increases of an index or a minimum guaranteed interest rate. The minimum guaranteed interest rate is guaranteed regardless of what the Index does. The formula used to calculate the current interest rate is guaranteed by the insurance company. Thus your premium in an equity-indexed annuity is not subject to index volatility. Like fixed deferred annuities, equity-indexed annuities also have penalties for early withdrawal called surrender charges or withdrawal charges. These charges typically decline over the length of the surrender charge period (typically five to ten years).