In the last Annuities post, The Single Premium Immediate Annuity, we learned how that type of annuity pays a stream of income after retirement. Now we’re going to take a look at the Equity-Indexed Annuity.An Equity-Indexed Annuity is a special type of contract between an annuitant and an annuity company. An EIA is different from other annuities because of the way it credits earned interest to the annuity’s value. Other annuities only credit interest calculated at a rate set within the contract. EIAs credit interest using a formula based on changes in the index to which the annuity is linked, usually the S&P 500, which could allow for much greater returns.
Like other types of annuities, an Equity-Indexed Annuity guarantees a minimum interest rate, even if the index rate is lower than the amount promised. In essence, they allow owners to enjoy the market’s upside without the risk that would ordinarily come with it, which would explain why EIAs have become so popular, especially amongst those looking to accumulate wealth.
While EIAs are attractive to those looking to accumulate or preserve wealth, they are not recommended for those that are preparing to transition into retirement. Many seniors have been taken advantage of by unscrupulous annuity agents that are only looking for a profitable, quick sale. If you’re unsure if an EIA is right for you then you should consult with a trustworthy annuity broker before purchasing this type of product.