What Is an Equity Indexed Annuity?
Video Summary: Equity indexed annuities can be appropriate for some investors but it's really a limited pool of people who it would be appropriate for
An equity index annuity is a fixed rate annuity that is tied to a particular index. As a general rule, an equity indexed annuity has a floor often zero, which is to say that if the index that it's tied to, for example, the SMP falls during that time frame, the investor does not take on the risk of loss. The trade-off, however, is that they have caps on how much of the return of the index that an investor will obtain. So, if the index, if the S&P were to go up 25% and investor may only be able to participate as low as five percent of those games. So there's limited upside, some downside protection. Equity indexed annuities can be appropriate for some investors but it's really a limited pool of people who it would be appropriate for; they have high cost ratios in them that they get difficult to make a significant return on them, and they paid large commissions to brokers and financial aid years which is one of the reasons that they're very popular with those and investment advisors and brokers but not appropriate for most customers.