Monday, May 02, 2005

Equity Index Annuities Cont'd

We are continuting our conversation on the article from 4/25 on the equity index annuity. All credits are given on that post fro 4/25. Once again, the article is in black and my comments are in red.

What is the Guaranteed Minimum Return?
The guaranteed minimum return for an EIA is typically 90% of the premium paid at a 3% annual interest rate. However, if you surrender your EIA early, you may have to pay a significant surrender charge and a 10% tax penalty that will reduce or eliminate any return. [There is really not a TYPICAL minimum guarantee. This can fluctuate across the board in indexed annuities. However, you need to know exactly what it is and how it is compounded. For example, if it is 3% on 90% of your money, most people make the mistake that you make 2.70% and that is NOT TRUE. The fact of the matter is that 90% of your money gets compounded at 3%. You might say that you will have less than 100% to start with and you are right. The point is, this minimum guarantee means that you MUST hold your contract for certain number of years to get some kind of return. But in fact, this kind of works like a surrender charge. In most, not all annuities, the minimum guarantee ACTS as the surrender charge. Think about it. If you surrender your contract in the first year, you would get 90% of your money---which is equivalent to a 10% surrender charge. REMEMBER---NOT ALL OF THEM WORK LIKE THIS SO BE CAREFUL AND KNOW YOUR EQUITY INDEXED ANNUITY by asking your financial professional.]

How good is this guarantee?Your guaranteed return is only as good as the insurance company that gives it. While it is not a common occurrence that a life insurance company is unable to meet its obligations, it happens. There are several private companies that rate an insurance company's financial strength. Information about these firms can be found on the New Jersey Department of Banking & Insurance's Web site. [There are many other resources for this. One unbiased resource that is highly regarded in the isurance industry is the Weiss rating. However, ratings aren't always enough. It is wise to do some homework on the insurance company you plan on investing with!]

What is a market index?
A market index tracks the performance of a specific group of stocks representing a particular segment of the market, or in some cases an entire market. For example, the S&P 500 Composite Stock Price Index is an index of 500 stocks intended to be representative of a broad segment of the market. There are indexes for almost every conceivable sector of the stock market. Most EIAs are based on the S&P 500, but other indexes also are used. Some EIAs even allow investors to select one or more indexes. [No big comments here]

Ignorance is NOT BLISS!

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