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Quatloos! > Investment Fraud > Financial Planning > Equity Indexed Annuities

Equity Indexed Annuities

An Equity Indexed Annuity (EIA) is a great financial tool. You get at least a minimum return, but a chance of greater returns according to participation in an index. For people who are afraid of losing money in the stock market, an EIA offers CD-ish safety but with the hopes of greater returns.

With only two exceptions, it is almost impossible to lose money with an EIA. The first situation is where the insurance company fails. This almost never happens, and even if it were to happen it is likely that investors would get most of their money back because of the deep reserves that insurance companies are required to keep, state funds, and a desire by insurance companies to maintain the insurance industry's stellar repuation. So, this isn't likely.

Where investors do lose money with EIAs is where they cash them in early, meaning during the surrender period. EIAs are meant as long-term investments to fund retirements, and nearly all EIAs have long surrender periods -- sometimes 10 years or even longer. Few EIAs have less than 7 year surrender periods.

While most EIAs allow some amount of money to be taken out of the cash value of the annuity during the surrender period, the withdrawal of this cash will usually affect the performance of the annuity in a very negative way. So, EIAs should NEVER be used where the investor might need the money during the surrender period.

Sadly, some insurance agents sell EIAs to investors who will need the liquidity during the surrender period. The insurance agent will not perform a liquidity analysis, and sometimes may not even warn the investor that there is a surrender period and steep surrender charges. After a few years passes, and the investor needs the money, only then does the investor find out that there are surrender charges or begins to understand that their money has effectively been tied up for some years.

Any insurance agent or financial advisor who sells an EIA without conducting a liquidity analysis or fully advising their client about the surrender period and surrender charges is liable for at least negligence, and perhaps fraud if he or her sales practices are such that investors are never warned about the surrender periods and surrender charges.

The market for EIAs has exploded in recent years, over an estimated $22 billion in 2005. Unfortunately, the number of unsuitable EIA sales has escalated also. Many people are now suffering financial hardships and having to borrow against their home equity, etc., because they were the victim of an unsuitable EIA sale.

Investors who believe that they have been caught in an unsuitable EIA sale should seek competent counsel to determine whether to seek relief. In egregious circumstances, the insurance companies will work to unwind EIA purchases, and sometimes action against the agent can be warranted.

A few attorneys who represent investors in cases where an unsuitable EIA sale has taken place have donated their time to help readers of and you may get on of them to contact you by sending an inquiry to tony [at]

Equity-Indexed Annuities:
The Smart Consumer’s Guide

Equity Indexed Annuities

Barnes & Noble

An equity-indexed annuity (EIA) is a fixed annuity that is valued by the greater of a published interest rate or by a formula that links the annuity to a stock index. While caps, participation rates and other limitations will keep the EIA from realizing the full growth of the index, there is still the potential for the annuity to grow at a better rate than by a simple interest rate. So long as no withdrawals are made from the annuity during the surrender period or before the consumer reaches age 59½, it is unlikely that a consumer will lose money with an EIA. Because of this inherent safety, EIA are a desired vehicle for retirement planning.

Equity-Indexed Annuities: The Smart Consumer’s Guide is a general reference that provides easy-to-understand explanations of the basic features of this advanced form of fixed annuity. This book does not claim to be a comprehensive product guide, or to compare different equity-indexed annuity products.

This book provides a consumer-level explanation of the basic operation of EIAs.

Chapter 1 introduces the equity-indexed annuity and describes it as a variation of a fixed annuity.

Chapter 2 discusses how the minimum interest rate is credited to the annuity.

Chapter 3 describes how index crediting can provide the maximum return for the annuity.

Chapter 4 talks about the various methods by which the annuity is linked to the index for crediting purposes.

Chapter 5 addresses the various payout options that are available.

Chapter 6 discusses the annuity company and financial ratings.

Chapter 7 discusses suitability issues, including complexity, disclosure, liquidity and withdrawals.

Chapter 8 talks about the portfolio role of EIAs.

Chapter 9 addresses tax considerations and how EIAs should be integrated into estate planning.

Chapter 10 discusses asset protection issues. Finally,

Chapter 11 offers questions that each consumer should ask before purchasing an equity-indexed annuity.

This book is also an excellent resource for agents to provide to their prospective clients so that their clients will better understand what equity-indexed annuities are and how they work. The book contains the full text of publications about EIAs from the NASD, NAIC, and SEC for prospective clients to read.

Few individuals have done more to educate the American public about financial scams than Jay Adkisson. As the creator of, Jay has helped many thousands of people worldwide avoid being scammed out of many millions of dollars to various investment schemes. The U.S. Senate Finance Committee has twice called Jay as an expert witness on abusive tax schemes. As one of the authors of “Asset Protection: Concepts and Strategies” (McGraw-Hill 2004), Jay has similarly helped thousands of people avoid dubious asset protection schemes.

In his latest book, Equity-Indexed Annuities: The Smart Consumer’s Guide, Jay gives a balanced and objective overview of this advanced form of fixed annuity to better educate consumers of the advantages, disadvantages, and the numerous product options that are available when considering the purchase of this popular retirement vehicle.

This short guide covers all the most important issues that consumers should address before purchasing an equity-indexed annuity, including:

  • How the minimum interest rate is paid, how the maximum return is linked to the stock index, and how participation rates and caps may limit returns.

  • How surrender charges may limit withdrawal rights for a period of years after the annuity is purchased, and why the annuity should not be purchased if the consumer will need the cash during this period.

  • How the annuity payments may be made, and what can happen upon the death of the annuitant.

  • How annuities benefit from tax-deferral, how taxes are paid upon withdrawal or when annuity payments are made, and tax considerations upon the death of the annuitant.

  • How the annuity and annuity payments may be protected from creditors in some states, and how in other states they may be protected by proper planning done in advance of claims.

This guide does not claim to address all issues that might arise from the many types of equity-indexed annuities now available to consumers, but it should give enough of a basic overview that consumers will be able to ask the right questions of their agent, and be able to compare the most important features between competing products. This guide should also give consumers the ability to intelligently answer the most fundamental question: Is an equity-indexed annuity right for me?

About the Author

Jay D. Adkisson is an investment consultant and attorney. He is best known as the creator of which is an internationally famous website that educates the public about financial and investment scams and tax frauds. Jay has twice been an expert witness for the U.S. Senate Finance Committee, and is the author of “Asset Protection: Concepts and Strategies” (McGraw-Hill 2004). Read more at

Some Warnings

Equity-Indexed Annuities are excellent products in the abstract and work for many consumers. For some consumers, however, equity-indexed annuities may not turn out to be a good purchase. These disappointed consumers will be those who discover too late that they needed their money during the surrender period or before they turned 59½, but they could not access it without penalty. These consumers should never have purchased an EIA in the first place, and a purpose of this book is to set out those circumstances in which a person should instead place their money into something that is more liquid so that they can meet their cash needs.

Securities Law Issues

When you should absolutely not buy an Equity-Indexed Annuity

You should absolutely NOT buy an Equity-Indexed Annuity if:

  • You anticipate needing most of you money from the Equity-Indexed Annuity during the surrender period.

  • You anticipate needing any amount of money from the Equity-Indexed Annuity prior to the time that you turn 59½.

  • You are having difficulty understanding the fundamental terms of the Equity-Indexed Annuity being offered to you.

If any of these three conditions apply, then you should absolutely not buy an Equity-Indexed Annuity. Do not allow yourself to be placed into a contract for which your situation is unsuitable.

Particular Things That You Absolutely Must Know

You must understand at least the following contractual terms of the Equity-Indexed Annuity that you are considering buying:

  • What is the financial rating of the annuity company?

  • What is the minimum guaranteed interest rate return? What is the participation rate for interest crediting?

  • How many years will surrender charges be charged? What are the surrender charges in each year?

  • How is the annuity linked to the index? What is the participation rate for index crediting? Are there caps?

  • What happens to the annuity if you die? Will the surrender charges be waived? Will your beneficiaries receive any money?

  • What are the exchange options? Will you be forced to annuitize?

  • Are there any tax consequences that you should know about?

What are the moving parts to this annuity? What terms or rates does the annuity company have the right to change?


NASD: Equity-Indexed Annuities-A Complex Choice

June 30, 2005

Why an Alert on Equity-Indexed Annuities?

Sales of equity-indexed annuities (EIAs) have grown considerably in recent years. Although one insurance company includes the word "simple" in the name of their product, EIAs are anything but easy to understand. One of the most confusing features of an EIA is the method used to calculate the gain in the index to which the annuity is linked. To make matters worse, there is not one, but several different indexing methods. Because of the variety and complexity of the methods used to credit interest, investors will find it difficult to compare one EIA to another.

Before you buy an EIA, you should understand the various features of this investment and be prepared to ask your insurance agent, broker, financial planner, or other financial professional lots of questions about whether an EIA is right for you.

What is an Annuity?

An annuity is a contract between you and an insurance company in which the company promises to make periodic payments to you, starting immediately or at some future time. If the payments are delayed to the future, you have a deferred annuity. If the payments start immediately, you have an immediate annuity. You buy the annuity either with a single payment or a series of payments called premiums.

Annuities come in two types: fixed and variable. With a fixed annuity, the insurance company guarantees both the rate of return and the payout. As its name implies, a variable annuity's rate of return is not stable, but varies with the stock, bond, and money market funds that you choose as investment options. There is no guarantee that you will earn any return on your investment and there is a risk that you will lose money. Unlike fixed contracts, variable annuities are securities registered with the Securities and Exchange Commission (SEC). To learn more about variable annuities, read our Investor Alert, Should You Exchange Your Variable Annuity?

What is an Equity-Indexed Annuity?

EIAs have characteristics of both fixed and variable annuities. Their return varies more than a fixed annuity, but not as much as a variable annuity. So EIAs give you more risk (but more potential return) than a fixed annuity but less risk (and less potential return) than a variable annuity.

EIAs offer a minimum guaranteed interest rate combined with an interest rate linked to a market index. Because of the guaranteed interest rate, EIAs have less market risk than variable annuities. EIAs also have the potential to earn returns better than traditional fixed annuities when the stock market is rising.

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.

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.

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.

How is an EIA's index-linked interest rate computed?

The index-linked gain depends on the particular combination of indexing features that an EIA uses. The most common indexing features are listed below. To fully understand an EIA, make sure you not only understand each feature, but also how the features work together since these features can dramatically impact the return on your investment.

  • Participation Rates. A participation rate determines how much of the gain in the index will be credited to the annuity. For example, the insurance company may set the participation rate at 80%, which means the annuity would only be credited with 80% of the gain experienced by the index.

  • Spread/Margin/Asset Fee. Some EIAs use a spread, margin or asset fee in addition to, or instead of, a participation rate. This percentage will be subtracted from any gain in the index linked to the annuity. For example, if the index gained 10% and the spread/margin/asset fee is 3.5%, then the gain in the annuity would be only 6.5%.

  • Interest Rate Caps. Some EIAs may put a cap or upper limit on your return. This cap rate is generally stated as a percentage. This is the maximum rate of interest the annuity will earn. For example, if the index linked to the annuity gained 10% and the cap rate was 8%, then the gain in the annuity would be 8%.

Caution! Some EIAs allow the insurance company to change participation rates, cap rates, or spread/asset/margin fees either annually or at the start of the next contract term. If an insurance company subsequently lowers the participation rate or cap rate or increases the spread/asset/margin fees, this could adversely affect your return. Read your contract carefully to see if it allows the insurance company to change these features.

Indexing Methods. As described in the table below, there are several methods for determining the change in the relevant index over the period of the annuity. These varying methods impact the calculation of the amount of interest to be credited to the contract based on a change in the index.

Indexing Method -- Description

Annual Reset (Rachet) -- Compares the change in the index from the beginning to the end of each year. Any declines are ignored.

Advantage: Your gain is "locked in" each year.

Disadvantage: Can be combined with other features, such as lower cap rates and participation rates that will limit the amount of interest you might gain each year.

High Water Mark -- Looks at the index value at various points during the contract, usually annual anniversaries. It then takes the highest of these values and compares it to the index level at the start of the term.

Advantage: May credit you with more interest than other indexing methods and protect against declines in the index.

Disadvantage: Because interest is not credited until the end of the term, you may not receive any index-link gain if you surrender your EIA early. It can also be combined with other features; such as lower cap rates and participation rates that will limit the amount of interest you might gain each year.

Point-to-Point -- Compares the change in the index at two discrete points in time, such as the beginning and ending dates of the contract term.

Advantage: May be combined with other features, such as higher cap and participation rates, that may credit you with more interest.

Disadvantage: Relies on single point in time to calculate interest. Therefore, even if the index that your annuity is linked to is going up throughout the term of your investment, if it declines dramatically on the last day of the term, then part or all of the earlier gain can be lost. Because interest is not credited until the end of the term, you may not receive any index-link gain if you surrender your EIA early.

  • Index Averaging. Some EIAs average an index's value either daily or monthly rather than use the actual value of the index on a specified date. Averaging may reduce the amount of index-linked interest you earn.

  • Interest Calculation. The way that an insurance company calculates interest earned during the term of an EIA can make a big difference in the amount of money you will earn. Some EIAs pay simple interest during the term of the annuity. Because there is no compounding of interest, your return will be lower.

  • Exclusion of Dividends. Most EIAs only count equity index gains from market price changes, excluding any gains from dividends. Since you're not earning dividends, you won't earn as much as if you invested directly in the market.

Can I get my money when I need it?

EIAs are long-term investments. Getting out early may mean taking a loss. Many EIAs have surrender charges. The surrender charge can be a percentage of the amount withdrawn or a reduction in the interest rate credited to the EIA.

Also, any withdrawals from tax-deferred annuities before you reach the age of 59½ are generally subject to a 10% tax penalty in addition to any gain being taxed as ordinary income.

Do EIAs and other tax-deferred annuities provide the same advantages as 401(k)s and other before tax retirement plans?

No, 401(k) plans and other before-tax retirement savings plans not only allow you to defer taxes on income and investment gains, but your contributions reduce your current taxable income. That's why most investors should consider an EIA and other annuity products only after they make the maximum contribution to their 401(k) and other before-tax retirement plans. To learn more about 401(k)s, please read Smart 401(k) Investing.

Is it possible to lose money in an EIA?

Yes. Many insurance companies only guarantee that you'll receive 90% of the premiums you paid, plus at least 3% interest. Therefore, if you don't receive any index-linked interest, you could lose money on your investment. One way that you could not receive any index-linked interest is if the index linked to your annuity declines. The other way you may not receive any index-linked interest is if you surrender your EIA before maturity. Some insurance companies will not credit you with index-linked interest when you surrender your annuity early.

If You Have Questions

If you have questions about EIAs, you can contact your state insurance commissioner. You can check out whether the person selling an EIA is registered with the NASD check NASD BrokerCheck or call our Hotline at (800) 289-9999.

Additional Resources

NASD Investor Alert, "Variable Annuities: Beyond the Hard Sell"

NASD Investor Alert, "Should You Exchange Your Variable Annuity?"

NASD Notice to Members 05-50, Member Responsibilities for Supervising Sales of Unregistered Equity-Indexed Annuities

National Association of Insurance Commissioners' Buyer's Guide to Equity-Indexed Annuities

Securities and Exchange Commission's Variable Annuities: What You Should Know.

To receive the latest Investor Alerts and other important investor information sign up for Investor News.

See Also:



Prepared by the National Association of Insurance Commissioners

The National Association of Insurance Commissioners is an association of state insurance regulatory officials. This association helps the various insurance departments to coordinate insurance laws for the benefit of all consumers.

This guide does not endorse any company or policy.

This Guide has been written to help you understand annuities in general and equity-indexed annuities in particular. There are different kinds of annuities. It is important for you to understand the differences among various annuities so you can choose the kind that best fits your needs. At the end of this Guide are questions you should ask your agent or the company. Make sure you are satisfied with the answers before you make a purchase.


An annuity is a series of income payments made at regular intervals by an insurance company in return for a premium or premiums you have paid. The most frequent use of income payments from an annuity is for retirement.

An annuity is neither a life insurance nor a health insurance policy. It is not a savings account or a savings certificate. You should not buy an annuity for short-term purposes.


Individual or Group

An individual contract covers only one or two persons. A group contract covers a specific group of people, for example, the employees of an employer.

Immediate or Deferred

An immediate annuity begins to make income payments soon after you pay the premium. The income payments from a deferred annuity start later, often many years later. Deferred annuities have an "accumulation" period, which is the time between when you start paying premiums and when income payments start. The time after income payments start is called the "payout" period.

Single Premium or Installment Premium

You pay the insurance company only one premium for a single premium annuity. You pay for an installment premium annuity through a series of payments. There are two kinds of installment premium annuities. One kind is a flexible premium contract. You can pay as much as you want, whenever you want, within set limits. The other kind is a scheduled premium contract, which specifies how much your premiums will be and how often you will pay them.

Fixed or Variable

During the accumulation period of a fixed deferred annuity, premiums (less any applicable charges) earn interest at rates set by the company or in a way spelled out in the annuity contract. The company guarantees that it will pay no less than a minimum rate of interest. During the payout phase, the amount of each income payment you receive is generally set when the payments start and does not change.

During the accumulation period of a variable annuity, premiums (less any applicable charges) are put into a separate account of the insurance company. You decide how those premiums will be invested, from stock or bond mutual fund choices. The value of the separate account, and therefore, the value of your variable annuity, varies with the investment experience of the funds you choose. There is no guarantee that you will receive all of your premiums back. There is also no guarantee that you will earn any return on your annuity. During the payout period of a variable annuity, the amount of each income payment you receive may be fixed (predetermined) or variable (changing with the value of the investments in the separate account).


An equity-indexed annuity is a fixed annuity, either immediate or deferred, that earns interest or provides benefits that are linked to an external equity reference or an equity index. The value of the index might be tied to a stock or other equity index. One of the most commonly used indices is Standard & Poor's 500 Composite Stock Price Index (the S&P 500), which is an equity index. The value of any index varies from day to day and is not predictable.

When you buy an equity-indexed annuity you own an insurance contract. You are not buying shares of any stock of index.

While immediate equity-indexed annuities may be available, this Buyer's Guide will focus on deferred equity-indexed annuities.


An equity-indexed annuity is different from other fixed annuities because of the way it credits interest to your annuity's value. Some fixed annuities only credit interest calculated at a rate set in the contract. Other fixed annuities also credit interest at rates set from time to time by the insurance company. Equity-indexed annuities credit interest using a formula based on changes in the index to which the annuity is linked. The formula decides how the additional interest, if any, is calculated and credited. How much additional interest you get and when you get it depends on the features of your particular annuity.

Your equity-indexed annuity, like other fixed annuities, also promises to pay a minimum interest rate. The rate that will be applied will not be less than this minimum guaranteed rate even if the index-linked interest rate is lower. The value of your annuity also will not drop below a guaranteed minimum. For example, many single premium annuity contracts guarantee the minimum value will never be less than 90 percent of the premium paid, plus at least 3% in annual interest (less any partial withdrawals). The guaranteed value is the minimum amount available during a term for withdrawals, as well as for some annuitizations (see "Annuity Income Payments") and death benefits. The insurance company will adjust the value of the annuity at the end of each term to reflect any index increases.


Two features that have the greatest effect on the amount of additional interest that may be credited to an equity-indexed annuity are the indexing method and the participation rate. It is important to understand the features and how they work together. The following describes some other equity-indexed annuity features that affect the index-linked formula.

Since new equity indexed annuity products are being developed, the contract you are interested in may contain a feature that is not discussed in this Buyer's Guide. If this is the case, ask your agent for an explanation that you understand.

Indexing Method

The indexing method means the approach used to measure the amount of change, if any, in the index. Some of the most common indexing methods, which are explained more fully later on, include annual reset (ratcheting), high-water mark and point-to-point.


The index term is the period over which index-linked interest is calculated. In most product designs, interest is credited to your annuity at the end of a term. Terms are generally from one to ten years, with six or seven years being most common. Some annuities offer single terms while others offer multiple, consecutive terms. If your annuity has multiple terms, there will usually be a window at the end of each term, typically 30 days, during which you may withdraw your money without penalty. For installment premium annuities, the payment of each premium may begin a new term for that premium.

Participation Rate

The participation rate decides how much of the increase in the index will be used to calculate index-linked interest. For example, if the calculated change in the index is 9% and the participation rate is 70%, the index-linked interest rate for your annuity will be 6.3% (9% x 70% = 6.3%). A company may set a different participation rate for newly issued annuities as often as each day. Therefore, the initial participation rate in your annuity will depend on when it is issued by the company. The company usually guarantees the participation rate for a specific period (from one year to the entire term). When that period is over, the company sets a new participation rate for the next period. Some annuities guarantee that the participation rate will never be set lower than a specified minimum or higher than a specified maximum.

Cap Rate or Cap

Some annuities may put an upper limit, or cap, on the index-linked interest rate. This is the maximum rate of interest the annuity will earn. In the example given above, if the contract has a 6% cap rate, 6%, and not 6.3%, would be credited. Not all annuities have a cap rate.

Floor on Equity Index-Linked Interest

The floor is the minimum index-linked interest rate you will earn. The most common floor is 0%. A 0% floor assures that even if the index decreases in value, the index-linked interest that you earn will be zero and not negative. As in the case of a cap, not all annuities have a stated floor on index-linked interest rates. But in all cases, your fixed annuity will have a minimum guaranteed value.


In some annuities, the average of an index's value is used rather than the actual value of the index on a specified date. The index averaging may occur at the beginning, the end, or throughout the entire term of the annuity.

Interest Compounding

Some annuities pay simple interest during an index term. That means index-linked interest is added to your original premium amount but does not compound during the term. Others pay compound interest during a term, which means that index-linked interest that has already been credited also earns interest in the future. In either case, however, the interest earned in one term is usually compounded in the next.

Margin/Spread/Administrative Fee

In some annuities, the index-linked interest rate is computed by subtracting a specific percentage from any calculated change in the index. This percentage, sometimes referred to as the "margin," "spread," or "administrative fee," might be instead of, or in addition to, a participation rate. For example, if the calculated change in the index is 10%, your annuity might specify that 2.25% will be subtracted from the rate to determine the interest rate credited. In this example, the rate would be 7.75% (10% - 2.25% = 7.75%). In this example, the company subtracts the percentage only if the change in the index produces a positive interest rate.


Some annuities credit none of the index-linked interest or only part of it, if you take out all your money before the end of the term. The percentage that is vested, or credited, generally increases as the term comes closer to its end and is always 100% at the end of the term.


Annual Reset

Index-linked interest, if any, is determined each year by comparing the index value at the end of the contract year with the index value at the start of the contract year. Interest is added to your annuity each year during the term.

High-Water Mark

The index-linked interest, if any, is decided by looking at the index value at various points during the term, usually the annual anniversaries of the date you bought the annuity. The interest is based on the difference between the highest index value and the index value at the start of the term. Interest is added to your annuity at the end of the term.


The index-linked interest, if any, is based on the difference between the index value at the end of the term and the index value at the start of the term. Interest is added to your annuity at the end of the term.


Generally, annuities offer preset combinations of features. You may have to make trade-offs to get features you want in an annuity. This means the annuity you choose may also have features you don't want.



Annual Reset


Since the interest earned is "locked in" annually and the index value is "reset" at the end of each year, future decreases in the index will not affect the interest you have already earned. Therefore, your annuity using the annual reset method may credit more interest than annuities using other methods when the index fluctuates up and down often during the term. This design is more likely than others to give you access to index-linked interest before the term ends.

Your annuity's participation rate may change each year and generally will be lower than that of other indexing methods. Also an annual reset design may use a cap or averaging to limit the total amount of interest you might earn each year.

High-Water Mark


Since interest is calculated using the highest value of the index on a contract anniversary during the term, this design may credit higher interest than some other designs if the index reaches a high point early or in the middle of the term, then drops off at the end of the term.

Interest is not credited until the end of the term. In some annuities, if you surrender your annuity before the end of the term, you may not get index-linked interest for that term. In other annuities, you may receive index-linked interest, based on the highest anniversary value to date and the annuity's vesting schedule. Also, contracts with this design may have a lower participation rate than annuities using other designs or may use a cap to limit the total amount of interest you might earn.



Since interest cannot be calculated before the end of the term, use of this design may permit a higher participation rate than annuities using other designs.

Since interest is not credited until the end of the term, typically six or seven years, you may not be able to get the index-linked interest until the end of the term.


Cap on Interest Earned

While a cap limits the amount of interest you might earn each year, annuities with this feature may have other product features you want, such as annual interest crediting or the ability to take partial withdrawals. Also, annuities that have a cap may have a higher participation rate.


Averaging at the beginning of a term protects you from buying your annuity at a high point, which would reduce the amount of interest you might earn. Averaging at the end of the term protects you against severe declines in the index and losing index-linked interest as a result. On the other hand, averaging may reduce the amount of index-linked interest you earn when the index rises either near the start or at the end of the term.

Participation Rate

The participation rate may vary greatly from one annuity to another and from time to time within a particular annuity. Therefore, it is important for you to know how your annuity's participation rate works with the indexing method. A high participation rate may be offset by other features, such as simple interest, averaging, or a point-to-point indexing method. On the other hand, an insurance company may offset a lower participation rate by also offering a feature such as an annual reset indexing method.

Interest Compounding

It is important for you to know whether your annuity pays compound or simple interest during a term. While you may earn less from an annuity that pays simple interest, it may have other features you want, such as a higher participation rate.

If there is a product feature that you do not understand, ask your agent. If you still do not understand, send the company a letter telling them that you want a written response so you can study their reply. You will be doing yourself a service!


In most cases, you can take all or part of the money out of a deferred annuity at any time during the term. There may be a cost if you do. Sometimes the cost is a stated dollar amount. In other cases, you give up index-linked interest on the amount withdrawn. Some annuities do not let you make a partial withdrawal until the end of a term.


If you withdraw all or part of the value in your annuity before the end of the term, a withdrawal or surrender charge may be applied. A withdrawal charge is usually a percentage of the amount being withdrawn. The percentage may be reduced or eliminated after the annuity has been in force for a certain number of years. Sometimes the charge is a reduction in the interest rate credited to the annuity.

Some annuities credit none of the index-linked interest or only part of it if you take out all your money before the end of the term. The percentage that is vested, or credited, generally increases as the term comes closer to its end and is always 100% at the end of the term.


Your annuity may have a limited "free withdrawal" provision. This lets you make one or more withdrawals without charge each year. The size of the free withdrawal is limited to a set percentage of your annuity's guaranteed or accumulated value. If you make a larger withdrawal, you may pay withdrawal charges. You may also lose index-linked interest on amounts you withdraw.

Most annuities waive withdrawal charges on withdrawals made within a set number of days at the end of each term. Some annuities waive withdrawal charges if you are confined to a nursing home or diagnosed with a terminal illness. You may, however, lose index-linked interest on withdrawals.


Depending on the index used, stock dividends may or may not be included in the index's value. For example, the S&P 500 is a stock price index and only considers the prices of stocks. It does not recognize any dividends paid on those stocks.


Annuity Income Payments

One of the most important benefits of deferred annuities is the right to use the value built up during the accumulation period to provide income payments during the payout period. While income payments are usually made monthly, you can often choose more or less frequent payments. The size of income payments is based on both the accumulated value in your annuity and the annuity's "benefit rate" that is in effect when income payments begin.

The insurance company uses the benefits rate to compute the amount of income payment it will pay you for each $1,000 of accumulated value in your annuity. The benefit rate usually depends on your age and sex, and the form of annuity payment you have chosen. You can usually choose from many forms of annuity payments. You might choose payments that continue as long as you live, or as long as either you or your spouse live, or payments that continue for a set number of years.

Death Benefit

Annuities provide a variety of death benefits. The most common death benefit is either the guaranteed minimum value or the value determined by the index-linked formula.

Tax Deferral

Federal income tax on interest accumulated in an annuity is deferred until you take the interest out of the annuity. You may be required to pay taxes then on the tax-deferred accumulation. You may have to pay a tax penalty if you withdraw the accumulation before you are age 59½. The advantage of tax deferral is that you will probably be in a lower tax bracket in retirement than while you are employed. Also, during the accumulation period, you will be earning interest on money that you would otherwise have used to pay taxes. Tax-qualified annuities are subject to different rules. In any case, you should consult your own tax advisor.


The questions listed below may help you decide which type of annuity, if any, meets your retirement planning and financial needs. You should consider what your goals are for the money you may put into the annuity. You need to think about how much risk you're willing to take with the money. Ask yourself:

How long can I leave my money in the annuity?

What do I expect to use the money for in the future?

Am I interested in a variable annuity with the potential for higher earnings that are not guaranteed and willing to risk losing the principal?

Is a guaranteed interest rate more important to me, with little or no risk of losing the principal?

Or, am I somewhere in between these two extremes and willing to take some risks?


As with any other insurance product, you must carefully consider your own personal situation and how you feel about the choices available. No single annuity design may have all the features you want. It is important to understand the features and trade-offs available so you can choose the annuity that is right for you. Keep in mind that it may be misleading to compare one annuity to another unless you compare all the other features of each annuity. You must decide for yourself what combination of features makes the most sense for you. Also, remember that it is not possible to predict the future market behavior of an index.


What is the guaranteed minimum interest rate?

What charges, if any, are deducted from my premium?

What charges, if any, are deducted from my contract value?

How long is the term?

What is the participation rate?

For how long is the participation rate guaranteed?

Is there a minimum participation rate?

Does my contract have a cap?

Is averaging used? How does it work?

Is interest compounded during a term?

Is there a margin, spread, or administrative fee? Is that in addition to or instead of a participation rate?

Which indexing method is used in my contract?

What are the surrender charges or penalties if I want to end my contract early and take out all of my money?

Can I get a partial withdrawal without paying charges or losing interest? Does my contract have vesting?

Does my annuity waive withdrawal charges if I am confined to a nursing home or diagnosed with a terminal illness?

What annuity income payment options do I have?

What is the death benefit?


It is very important that you choose an annuity that you understand well. The purpose of this Buyer's Guide is to help you to understand your annuity. Your agent or insurance company can guide you. Remember that the quality of service you can expect from the company and the agent should also be important to you when you buy an annuity.

When you receive your contract, read it carefully. It may offer a "free look" period for you to decide if you want to keep the contract. Ask your agent or insurance company for an explanation of anything you don't understand. If you have a specific complaint or can't get the answers you need from your agent or company, contact your state insurance department.

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