There is an alternative investment out there for those seeking both high potential returns and annuity benefits, according to Investopedia’s “Are Equity-Indexed Annuities Right For You?” Author Brigitte Yuille explains how the indexed annuity can work for more conservative investors. The payments can be deferred until a later date or begin immediately just like traditional annuities. Your return is linked to a stock market index like the Dow Jones Industrial Average. Because of this, you may take on more risk than you would with a traditional variable or fixed annuity.
Equity indexed annuities have a minimum guaranteed interest rate, no matter what happens in the index to which they are linked. While this rate is low, in an increasing stock market you will see higher gains than with a fixed annuity. The market risk is different than with variable annuities because of this guaranteed minimum. With any of these products, annuity rates depend on the time you purchased your product and the stipulations in your individual annuity contract. With an indexed annuity, you have to look closely at the participation rate, any caps on the interest rate, and whether there is a spread, margin, or asset fee attached.
The guaranteed minimum returns for indexed annuities usually make them a good investment. They also offer tax-deferred growth and an interest credit on the annuity’s anniversary date. Two downsides that investors have realized are the inability to withdraw your money early without hefty penalties and abnormally high commissions on some products. Speak with an expert to see if an equity indexed annuity is right for you.