At this point in the course you should already understand the basic differences and similarities between a fixed annuity and a variable annuity. The question here is “What is an Equity-Indexed Annuity?”
Well, you can think of an equity-indexed annuity as a sort of amalgamation of the fixed and variable annuities. The combination of features provides you with some of the benefits of both types.
How is it a Combination Annuity?
We know that a fixed annuity can offer you a guaranteed interest rate, promising a certain level of earning, lowering your risk. This may be around a two to three percent guaranteed minimum.
This is definitely an attribute of the fixed annuity we would all love to have with an equity-indexed annuity. A bottom-line guarantee minimizes any risk, promising our investment to at least earn some modest amount if all else fails.
Now, some risky investors who want big gains may consider the fixed annuity aspect to be a negative, because your interest rates are lower when you have the guaranteed return. However, this is not the whole story. Because we also said the equity-indexed annuity also resembles a variable annuity. How is this so?
A variable annuity has fluctuating interest rates based on the gains of the stock market. But the stock market can also lose out, leaving you with lost investment capital. This can be considered a positive or negative depending on the character of the investor.
The equity-indexed annuity resembles the variable annuity in this fashion in that its returns are tied to the performance of the stock market. It will follow an index that is considered a benchmark like the S&P 500.
So this is the equity-indexed annuity. It is the hybrid of the fixed and variable annuity. It is the child that received positive qualities from both parents, maximizing possibilities while minimizing risks. This is a good investment for those with hesitations and anxieties about not at least earning some guaranteed amount of money. It is comfortable and easy to understand.
Consider this type after you understand the full differences between a fixed annuity and a variable annuity and see if it feels a bit safer than a variable annuity alone, but less of a squandered opportunity than a fixed annuity alone. Before you cash out your annuity, know these differences.