Your Primer on Equity-Index Annuities

EIAs are typically tied to a particular stock market index such as the S&P 500 or the Dow Jones Industrial Average. An EIA typically guarantees that your principal investment will not go down in value, and offers the potential for higher returns if the stock market index to which it is linked performs well.

During a given year, if the stock market rises, the owner of an EIA will enjoy additional gains, depending upon the performance of the related stock market index. If the index goes down during that same time period, the annuity owner typically has a safety net – the EIA’s value at the beginning of the year (plus, in some cases, a guaranteed minimum rate of return).

EIAs are investments. Like most other investments, EIAs have upsides and downsides.

• Principal Guarantee: Many EIAs provide that you’ll receive at least 100% of your invested funds; others guarantee only 90%.
• Participation Rate: This is the percentage of the stock market index’s gain that is credited to the annuity. One EIA might offer a return equal to 85% of the gain; another might offer 45%.
• Participation Rate Changes: Insurers often reserve the right to change the participation rate from year to year. If the insurer lowers the rate, this could reduce your return.
• Caps: Caps create limits on the gain regardless of the performance of the index. Even though an EIA might provide a 100% participation rate, a cap would limit any gain to a certain figure (like 7% a year).
• Spread / Margin / Asset Fee: Some EIAs subtract this type of fee each year from EIA’s gain.
• Returning Customers: Some carriers offer lower returns to returning customers than they do to new customers.
• Guaranteed Minimum Rate: Some EIAs offer a guaranteed minimum rate of return. A guaranteed minimum is sometimes adjustable in the future, and in some cases only applies to funds withdrawn in a certain manner. For example, an EIA might guarantee a minimum 3% return over a certain number of years, but only if you withdraw funds in the form of lifetime monthly income.
• Method of Calculating Index Changes: EIAs employ differing methods for calculating yearly changes in a stock market index. Differing methods (e.g., monthly averages and annual point-to-point calculations) can produce wide disparities in calculating EIA returns.
• Deducting Expenses: A few companies deduct expenses from the gains before calculating the EIA’s net return.

• Does the EIA guarantee at least 100% return of your invested funds?
• Which stock market index does the EIA use?
• What is the participation rate in the stock market index?
• How are index changes calculated?
• Is there any limit (cap) on the rate at which the value may grow in any given year?
• Are purchasers who have invested in the past given the same participation rates and caps as new annuity investors?
• Are any expenses or fees deducted from the market index gains before the net gain is calculated? If so, what are they?
• If there is a minimum guaranteed rate of return, are there any restrictions tied to when you withdraw funds from the EIA?
• What surrender charges are applied to the EIA, and for how long?
• Are surrender charge periods applied based upon the date any new money is invested, or are they based upon my initial annuity contract date?

• a salesperson is not required to have a securities license (unlike someone who sells variable annuities), and
• there is no prospectus (which would come under the scrutiny of the SEC) – typically a Statement of Understanding spells out a particular EIA’s rules and their exceptions.

[The above article is taken from H.E.L.P.'s Spring 2005 H.E.L.P. Is Here]