Definition of an Equity Indexed Annuity
An equity index annuity in the United States is a type of tax-deferred annuity whose credited interest is linked to an equity index –SEE EXAMPLE HERE>>[1], and typically uses the S&P 500 or international index. It guarantees a minimum interest rate (typically no less than 3%) and protects against a loss of principal. An equity index annuity is a contract with an insurance or annuity company. The returns may be higher than fixed instruments such as CDs, money market accounts, and bonds but not as high as market returns. Equity Index Annuities are not FDIC insured and are subject to the risk of default by the issuing company.
The contracts may be suitable for a portion of the portfolio for those who want to avoid risk and are in retirement or nearing retirement age. The objective of purchasing an equity index annuity is to realize greater gains than those provided by CDs, money markets or bonds, while still protecting principal. The long term ability of Equity Index Annuities to beat the returns of other fixed instruments is a matter of debate. Read more…