Equity-Indexed Annuities

Equity-Indexed Annuities

A Safety Net for Stock Investors

by David Durham, MSFS CAP, www.durhamloyal.com

Experts vary in their approach to putting together the right portfolio for their clients. Obviously each one has to be based on their short- and long-term goals. Historically, stocks and bonds tend to be favored because they have better long-term performance records than some of the other options. Nevertheless, there are other things to consider in securing your financial future.

ddEveryone’s portfolio needs versatility. There is not a safer way to hedge yourself against market fluctuations and the unknown risks that we have seen since the year 2000.
Allow me to show you some good options that you could use to broaden your portfolio and add the needed security we are all looking for in our investments. Consider equity-indexed annuities (EIAs). They are a popular vehicle used for managing stock market risk. These products deserve special consideration. They are often called “Hybrids,” because they are specifically designed to offer investors the best of both worlds—potential stock market growth with a guaranteed minimum return. Allow me to clarify this for you.

Annuity Options. An annuity is a contract between you and an insurance company. The terms of the contract may vary considerably, depending on which type of annuity you choose: deferred or immediate, fixed/“Hybrid” or variable.

Equity-Indexed Annuities Offer a Blended Solution. The reason equity-indexed annuities are called “Hybrids” is because they combine the key benefits of fixed and variable annuities to offer guaranteed principal protection with the potential for stock market gains. EIA returns are generally tied to the performance of a stock market index—usually the S&P 500, which represents a broad cross-section of industries. When stocks climb, the annuity’s returns reflect the rising value of the index to which it is linked. But if stocks tumble, the worst the investment can do is earn 0% interest. In this way, the principal balance is protected from potential losses.

EIA returns can be structured in several different ways. With one popular method, the issuing insurance company pays a certain percentage of the gain made by the index to which the annuity is tied. This percentage is called the participation rate. If the participation rate on an annuity is 70% and the index to which it is tied rises 8%, the resulting gain for the investor would be 5.6% (70% x 8%).

For many investors, a few percentage points is a small price to pay for the added security of guaranteed principal.

Because the guarantees of an equity-indexed annuity are contingent on the claims-paying ability of the issuing insurance company, it is critical to buy from a provider whose reputation and longevity you can trust. A trained eye can also help you sort through the features and provisions of the various investments to find the best fit for your portfolio.

An EIA can be an important vehicle to consider for those who like the outlook for the financial markets, yet want to manage their risk. Please call if you would like to determine whether EIAs are appropriate for your current financial situation.

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