The Advantages and Disadvantages of Equity Index Annuities

VanderPal, Geoffrey
January 2004
Journal of Financial Planning;Jan2004, Vol. 17 Issue 1, p56
Academic Journal
The article discusses the advantages and disadvantages of equity index annuities. An equity indexed annuity (EIA) is a fixed annuity and does not require a securities license to solicit clients. Due to the unique nature of the EIA with its principal protection and index-linked returns, an EIA may be more appealing than standard fixed annuities without the market risk of variable annuities or mutual funds. To better understand the mechanics of an equity indexed annuity, planners need to understand the major crediting methods used to calculate the index-linked returns in order to evaluate potential returns for a contract owner. The point-to-point design credits interest based on the difference between the index value at the beginning and end of a period of at least one year. The high-water point is a variation of the point-to-point term method. The averaging method averages the index performance over a period of time on a monthly, weekly or daily basis. The mechanics of the EIA are base on a targeted maturity investment grade bond portfolio and equity index options of a particular index. The EIA is not designed for outperforming the index long term, but instead is designed to allow for investors to potentially receive better returns over standard fixed instruments without market risk. INSET: Executive Summary.


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