We learned that an equity-indexed annuity is basically just a combination of a fixed annuity and a variable annuity. Like a fixed annuity, it features a guaranteed minimum return on your investment, so you can rest easy knowing you won’t lose money but are promised some amount of interest earned.
But like a variable annuity, the equity-indexed annuity also will vary based on the performance of the overall stock market as a whole. Having your investment’s interest rate tied to this can be a opportunity to earn money without taking a huge risk of losing money, since you still have the guaranteed earnings of the fixed annuity. Let’s take a closer look at the equity-indexed annuities pros and cons.
Advantages of the Equity-Indexed Annuity
The absolute, most important benefit of the equity-indexed annuity is that when the stock market is performing well, you are earning more money. But that’s not the entire story. The best part is that you will have minimized any risk of losing money because you are promised a minimum return thanks to the fixed annuity aspect. This protection is very safe. It minimizes, or essentially removes, risk.
You can think of the advantages of the equity-indexed annuity in this summarized fashion: you will most likely earn a higher amount of money than you would with a regular fixed annuity, without all of the problems you would encounter with a variable annuity in case there was small crash in the stock market during your investment.
Disadvantages of the Equity-Indexed Annuity
The problem with an equity-indexed annuity is that they aren’t quite as simple as the more basic annuities. It takes a bit more effort and research to fully understand what you are getting into, and there are many varieties of these annuities. The complexity and number of choices make it hard for an unlearned investor to make a decision, especially when not given the entire story by their agent attempting to simplify things.
Now, you didn’t think you could get the best of both worlds of the fixed and variable annuity without there being some catch did you? If the index you invest in has a huge stock market gain, you won’t be receiving a full match on that return like you would with a variable annuity. There may be some percentage cap or annual cap on earnings you can get. This is the price of having that fixed annuity guarantee, which may be worth it. That is your decision to make.
If you choose to withdraw your money earlier than the date of full maturity, there will be a very steep surrender charge, upwards to twenty percent that could hit your earnings for up to fifteen years. If you decide to invest in an equity-indexed annuity, be prepared to leave your money in it for a very long time or be prepared to lose a lot of money.