Equity Linked Annuities – Know the Truth
April 2nd, 2011 | Author: weissheiss
In almost all financial publications you see tons of information regarding these new products: Equity Linked Indexed Annuities. What are they and are they as good as it sounds? The answer is obvious, nothing is ever as good as it sounds and that is a great point of reference when looking at anything.
Equity indexed annuities (EIA’s) are insurance products which link their crediting rate (annual performance) to an outside source such as the Dow Jones Industrial Average. Each year on the anniversary of the annuity contract, the insurance company measures any growth (based on the specific contract) and credits that calculated growth to the contract. If the growth was negative then one of two options will prevail. Some companies offer a minimum guaranteed interest which would be sued in the calculation and some contracts will credit zero interest for the time period. Either method provides for the full guarantee of the principal. Nothing is ever at risk except the annual crediting which is only determined on the anniversary date. The reason it is considered at risk is because it has not been determined what the crediting rate will be. Once it is credited it then falls under the guaranteed portion and the account will never be less.
They can be confusing and often are not understood in their entirety by the agent. It is always important to take your time and fully understand these products. They can be wonderful additions to your retirement planning when used properly and with the ultimate goal for which they are intended, supplemental retirement funds.
As with all important financial decisions make certain you understand not only contractual details but also any possible tax liability. In time these products will become a centerpiece of retirement planning and will be considered as a truly breakthrough product when used properly.
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