What is an Equity Index Annuity and How Does it Work?
An equity-indexed annuity is a fixed annuity where the rate of interest is directly linked to the returns of the stock index. An example of one of these stocks is S&P 500. Equity-index annuities may appeal to moderately conservative investors, as it is a safer option than some other annuity investments. An index annuity is meant to protect your savings against your losses, making it relatively safer than other investments. You can receive good markups without as much risk. Your contract may also lock in your gains for a certain period such as a single year. An index annuity is also known as an equity index annuity or fixed index annuity is a complex financial instrument that has the characteristic of both fixed and variable annuities. Indexed annuities offer a minimum guaranteed interest rate with an additional interest rate tied to the market index. That is where this specific type of annuity got its name.
For example, an annuity contract with a one-time payment of $100,000 would pay approximately $505.88 per month for 20 years with a 2 percent growth rate.
Equity indexed annuities typically do not charge up-front sales charges, but often have significantly high surrender fees. Surrender fees are only important if you think you may need to take many from your annuity before the end of the surrender period. Alongside surrender fees, there may be some other hidden fees applied to your annuity plan. To make sure you know everything there is to know before purchasing an equity-indexed annuity make sure to speak with a reputable independent agent. If you are confident in your financing and understand that an annuity is meant for your retirement years and not sooner than an equity-indexed annuity may be right for you.
The “floor-in” for an equity index annuity is the minimum index-linked interest rate you could earn. Most fixed index annuity contacts have a floor percent of zero, but most state insurance laws require a minimum guaranteed rate of between 1-3 percent on 87.5 percent of the paid premium dollars. Protecting you as the insured.
Now you may be wondering how is this all taxed? Generally, gains/earnings which are withdrawn from an equity-indexed annuity are taxed as ordinary income and are not taxed until you withdraw them. This means that you will not have to file them with your taxes until you start to withdraw the money.
Equity indexed annuities are regulated at the state level by laws that protect both the insurer and the insured. Each state has its own laws so when shopping for an annuity plan it is important to also understand the laws your individual state has in place to protect you.
Investing in an annuity should be considered part of your planning for the future, which includes growth assets that can help offset the inflation throughout your lifetime. Many advisors will tell you that the best age to start investing is between 55 and 75 years old which would allow for the maximum payout. Some companies cap the buying age for annuities at 75 while others will allow you to buy up until the age of 85. Overall the average cut-off limit tends to be about the age of 80. You may want to know what age is too young to purchase an annuity and that answer holds a bit larger age discrepancy because you can start investing n an annuity as young as 40 or 45 years old with certain companies. To get the maximum capacity of your annuity investment you should let it sit for at least ten years. While you can buy an annuity at any age it simply does not make sense to start investing closer to retirement age than to college student ages.
I hope all of this information was helpful in explaining to you, what an equity-indexed annuity is and how it can help you prepare for the future after your career. Don’t forget that when finding an agent you want an independent agent who will be there for you and not just looking to make a sale for his company. You want someone who will make sure you’re getting the right annuity for you.