An equity-indexed annuity is a hybrid between a fixed and variable annuity. It is a fixed annuity by legal statute, but it has offerings inside of it that allow the contract holder to indirectly invest in stock market indices such as the S&P 500, Dow Jones, and Nasdaq 100. One of the main features of EIA's are their ability to guarantee a floor to your earnings with no loss once earned. If your account credits from $100,000 to $110,000 in a given contract year, most EIA contracts will guarantee that you will not "lose any gains" from $110,000 but rather earn $0 or 1% depending on the floor of your contract if the market loses the following year. EIA's offer fixed accounts within their contracts that offer a guaranteed rate for typically 1 year.
In addition to the guaranteed fixed rate, many EIA's also offer a guaranteed interest rate for your Living Benefit account value. There are some out there that offer 10% a year for 10 years that means your money is contractually guaranteed to double over a 10 year period. This is assuming you follow all terms and conditions of the contract. Like almost all annuities, EIA's have surrender charge periods (usually 5-10 years) that encourage the contract holder to only withdraw a portion (typically 10% a year is an industry standard) if needed to help foster long-term growth.
EIA's can be an excellent addition to a portfolio that is trying to mitigate risk but also add a growth component to a conservative portfolio. EIA's are commonly misunderstood in the general public, but a good investment professional will utilize the features of the correct vehicle that will add value to a well-balanced portfolio.
Equity Indexed Annuity
A variable annuity is a type of annuity contract that allows for the accumulation of capital on a tax-deferred basis. It acts in the same way a deferred fixed annuity does that offers a guaranteed interest rate and a minimum payment at annuitization. The defining characteristic variable annuities is that they offer investors the opportunity to directly invest in the stock market through the use of equity and bond subaccounts.
A variable annuity subaccounts are in many ways just like mutual funds. If a variable annuity is annuitized for income, the income payments can vary based on the performance of the subaccounts this is known as variable annuitization. Variable annuitization is usually an option you have when deciding on how to take income. Just like fixed annuities can be annuitized for a fixed payment in perpetuity for the annuitant the same can be selected with a variable contract.
Variable annuities are also subject to surrender charges depending on the share class you choose at investment inception. Many people don't realize this but many (if not all) insurance companies that issue variable annuities give the investor a choice in surrender period through share class selection. Surrender charges or Contingent Deferred Sales Charge or (CDSC) are a choice if you want your money to be liquid you can in many cases choose a share class that has no CDSC you will, however, have to pay a higher annual internal cost than if you selected a share class that has a 3 or 7 year surrender charge.
Single Premium Immediate Annuity or SPIA
A Single Premium Immediate Annuity is a contract between you and the insurance company where you give the insurance company a lump sum of money (Single Premium) and in return the give you a guaranteed payment for a specified time period or until you or your and your spouse dies.
The purpose of an SPIA is to provide you with a guaranteed income stream. During retirement market fluctuation of principal, "market risk", and varying interest rates, "interest rate risk" leads to uncertainty of future income. An SPIA "REDUCES THE RISK" and provides certainty, peace of mind, in providing an income you can count on!
Payment Options - Generally Available
Annuity payments are available monthly, quarterly, semi-annually or annually. They may begin immediately, or they may be deferred for up to one year from purchase. You may choose any one of the following annuity payment options:
Payments for life (single life annuity):
Annuity payments are made as long as the annuitant is still living. Annuity payments stop upon the annuitant?annuitant's death, even if that occurs shortly after the annuity payments begin - no matter how many or how few annuity payments have been made.
Payments for two lives (joint and survivor annuity):
Payments for two lives (joint and survivor annuity). Annuity payments are made as long as either of the two joint annuitants is still living. Annuity payments can remain level or be reduced upon the death of one of the annuitants. Annuity payments stop upon the surviving annuitant's death, even if that occurs shortly after the annuity payments begin - no matter how many or how few annuity payments have been made.
Certain period. Annuity payments are made for a period specified by the owner, from five to 30 years. Annuity payments continue until the end of that certain period, regardless of whether an annuitant is still living.*
Payment for life or for two lives, with a certain period:
Annuity payments are made as long as an annuitant is still living, or for a certain period specified by the owner, whichever is longer.*
Payments for life with or for two lives, with an installment refund:
Annuity payments are made as long as an annuitant is still living, or until the entire purchase amount has been paid out in the form of annuity payments, whichever is longer.*
Payments for life or for two lives, with a cash refund:
Annuity payments are made as long as an annuitant is still living. When no annuitant is still living, any remaining purchase amount will be paid in a lump sum. The remaining purchase amount, if any, will be the amount of the original purchase payment less all annuity payments that have been made.
* When no annuitant is still living, the owner (or the beneficiary if the owner is no longer living) may elect to terminate the contract and receive the commuted value, as defined in the contract, of any remaining annuity payments in a lump sum. The commuted value of any remaining annuity payments will be less than the total of those remaining annuity payments.
Separate fact from fiction and get the truth on annuities. Some people may say annuities are a waste of money and other will say annuities are the greatest investment you can have in your portfolio.
Everyone is different and what's important to them when investing is no exception to the rule. When you're planning your retirement it's important to find out what you're trying to accomplish.
People typically tend to have 4 top goals.
Grow their nest egg.
Receive income from their retirement assets.
Pass on wealth to the next generation.
All of the above.
Once you figure out what's most important to you then the real fun starts off of how you're going to get there. Having helped hundreds of individuals and families invest for their retirement we have a firm respect of what annuities can provide.
Tax deferral is one topic you will hear people talk about as one of the positive feature's annuities have. That is true annuities do defer your taxes on growth but let's face it so does just about every retirement account out there.
The Biggest Benefit Annuities Provide
Protection from the sequence of returns. If you're asking yourself what is the sequence of returns think about that friend, college, or family member you know who had to put off their retirement because they fell victim to the 2008 stock market crash. That's the sequence of returns the natural Eve and flow of the marketplace and that's what only an annuity can protect you from.
for There are additional benefits annuities provide such as lifetime income, guaranteed growth, spousal continuation, lump sum death benefits and more. To find out more and see if an annuity is right you call or email us today to set up your free consultation.