Annuity is one of the best options for retirees who wish to continue living a good life after their retirement. There are so many types of annuity for retirement but one of the most popular is equity index annuity. Equity index annuity earns interest through stocks and several other equity indexes. The most common index is S & P 500.
There are other annuities in the financial market but what makes equity index annuity very different is how credit interest is applied to your annuity. Ideally, the credit interests for fixed annuities are set depending on the assigned rate stipulated in your contract. However, with equity index annuity, the interest rate is credited by using a formula based index changes.
What makes equity index annuity profitable is when the fixed annuities earn an interest. By default, your annuity will earn a minimum interest rate. The minimum interest rate is given regardless the performance of your money in the index. Likewise, the value of your annuity will not drop below what is written in your contract. If your contract stipulates that you will receive a minimum of ninety percent interest rate in addition to the 2% annual interest, then, your annuity will receive that interest even if your index interest rate is lowered in its market performance.
Pros and Cons of Equity Index annuity
The number one advantage is the locked in feature of the interest rate. Most investment instruments out there are affected by the market performance. You may lose a chunk of money when the investment goes awry but with equity index, you are guaranteed that the interest rate is locked and will be credited to your annuity.
Another benefit of equity index annuity for retirement is the annual reset feature of the annuity. Meaning, your annuity will not lose the interest that you already earned in the past because with annual reset, your annuity is protected in contrast to the market changes each year. With this feature, you can keep the interest to your investment that you received annually and each year is different from the others.
Index equity is calculated on the formula based structure. The common formula used is the highest value of the index during each term. This process allows the annuitant to earn much more than in any other investment funds.
However, like other investment funds, index equity may also have some disadvantages. The most common disadvantage is that it is long-term investment. You may not be able earn if you withdraw your money before seven to eight years. The most ideal is to let your index annuity to stay for more than ten years to make the most of your investment but if you want an instant cash, then, index annuity may not be ideal for you.
Features of Equity Index Annuity
Equity index annuity has cap limit on interest earned, which you may earn annually. The cap limit is the highest you can earn for each term. Unlike other investment that you may not, you are a dime depending on the market performance but with equity index annuity, your annuity is guaranteed to earn an interest that will be credited to you each year regardless of market performance.