The Fixed Indexed Annuity for Conservative Investing

Many retirees and those close to retirement are more concerned with wealth preservation than wealth creation. A safe and secure alternative to investing in the broader markets is an equity indexed annuity. Guaranteed not to lose value due to market corrections, this account has become more popular in recent years.

Investors are looking for safe investments and security of their long term money more than ever. With oil at an all time high, a prolonged housing downturn and many experts calling for a recession, safe returns in the overall markets are harder to come by. Most investors experienced the stock market correction from 1999-2002 and know how quickly retirement accounts can lose value. Years later, numerous brokerage and variable annuity accounts still have not recovered their losses from that time period. Unfortunately, many investors were counting on those funds to provide income during their retirement years.

There is however, at least one account guaranteed to maintain its value during market corrections. An equity indexed annuity, also referred to a fixed indexed annuity, can be a wise solution for the conservative investor. Designed to provide a greater return than a traditional fixed annuity, an equity indexed annuity can be a reliable alternative to a brokerage account or variable annuity. The premise is a simple one. An indexed annuity will increase in value when stock market indexes go up (i.e. ? the S&P 500), but will not lose value when market indexes go down.

Technically, equity indexed annuities are characterized as fixed annuities. At no point does the investor ever own any variable type of security like a stock, bond or mutual fund within the account. The accounts do not fluctuate in value like a variable annuity will. However, an equity indexed annuity does not operate exactly like a typical fixed annuity either.

The Equity Indexed Annuity Advantage - EIA

What makes an EIA different than a traditional fixed annuity is in the manner interest is credited to the account. Unlike a fixed annuity, the earned interest does not accumulate in the account. Instead, the insurance company will use that interest to buy an option contract in a particular index like the DOW, S&P 500 or the NASDAQ. After a period of time, usually one year, the option contract comes due. One of two things will then occur. If the market index has advanced, the option is cashed in and interest is credited to the annuity principal. Conversely, if the market has retreated, the option expires and no interest is credited to the account for that year. In this way, the investor has only risked the fixed interest which would have normally been paid to the account, not the principal. In practice, the annuity either gains or maintains value each year, but the investment cannot decrease due to negative market fluctuation.

Investors should also know that most equity-indexed annuities have a fixed interest account as an additional investment option. When interest rates are high and the stock market is in decline, the annuity owner can choose to invest in the fixed account for a one year period as oppose to one of the indexed accounts. It is also important to note that all EIAs have a minimum guarantee associated with their returns. For example, this guarantee might state that if the market declines every year over the life of the annuity, the insurance company will guarantee payment of 4% on the premium deposited.

Equity Index Performance

How do these annuities perform? Historically, many indexed annuity accounts have averaged returns of 7% or better. In years when the broader markets have performed well so have EIAs. It is not uncommon for investors to enjoy interest payments during these prosperous years of 10-20% or better. But the crucial value of these accounts is realized during rapid market declines, when the equity indexed annuity will maintain its principal as well as interest gains from past years.

These facts may explain the recent popularity of EIAs, especially among retirees looking to preserve a lifetime's worth of hard work. With the market advancing and declining so rapidly, many consumers are looking for safety and security without having to sacrifice reasonable interest returns. Granted, these annuities will not return 50% in one year, like a stock or mutual fund might, but the peace of mind investors gain knowing their investment cannot lose 50% has many consumers investing in annuities for the long term.

A.M. Hyers owns and operates Hyers and Associates an independent agency specializing in fixed, indexed an immediate annuity accounts.
To learn more about equity-indexed annuities and other insurance products visit:
Hyers and Associates, Inc.