The equity-indexed annuity is a relatively new product. These annuities earn interest or provide benefits that are linked to an external stock or bond index, such as the S&P 500, NASDAQ, or DOW
Equity-indexed contracts combine 2 features not found together in any other type of annuity: a guaranteed minimum interest rate and the potential for higher earnings based on the performance of the external index.
In general, equity-indexed annuities have several features in common.
- Contracts are divided into periods of time or terms
- Certain features can be renewed from one term to the next
- Your gain each term is limited to a percentage of the index's increase or a dollar cap
- The company may calculate your earnings in many different ways
The value of any index varies from day to day and cannot be predicted. When you buy an equity-indexed annuity, you own an insurance contract. You are not buying shares of any stock or index.
Equity indexed annuities also provide a guarantee on the downside, which is why many investors in equity indexed annuities accept a conservative ceiling on their gains. For individuals who do not want to take any downside risk, equity indexed annuities are one of the best options available.
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