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Frequently Asked Questions |
| Equity Indexed Annuity Questions |
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| How long is the term? |
| Most equity index annuity terms range from 5 to 12 years. It is important to be comfortable with the term you choose because certain types of indexing methods that determine your interest are not calculated until the end of the term. Therefore, leaving the contract before the end of the term may result in minimal interest returns. Also, like most fixed and variable annuities, early surrender charges may apply. |
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| What is the guaranteed minimum interest rate? |
Much like traditional fixed annuities, equity indexed annuities offer a minimum guarantee of interest (assuming they are fixed indexed annuities). The reason they are considered “fixed” annuities is because of this minimum guarantee, unlike variable annuities that may have no “floor” to the contract values. There are, however, variable indexed annuities on the market, although lesser in number. 3% is a common minimum interest guarantee for fixed equity indexed annuities. In most cases though, it works differently than the typical 3% in traditional fixed annuities.
Example (traditional fixed):
$100,000 value at beginning of year earning 3% will result in $103,000 value at the end of the year.
With many indexed annuities, the minimum guarantee will often be stated as 3% on 90% of your premium. This means that the minimum interest of 3% will be applied to 90% of your deposit(s). That minimum value at the end of the first year will earn 3% in the next year, and so on.
Example: (fixed equity indexed annuity):
$100,000 initial deposit
Minimum value at the end of the first year = $92,700 ($90,000 x 3% = $2,700)
3% on 90% of premium – At the end of the indexing term, you typically would receive the higher of the actual indexed value or the minimum guarantee. An example of the minimum guarantee, or floor, is illustrated below.
| End of Year |
Minimum % of
Premium Guaranteed |
Minimum Value
(based on $100k initial deposit) |
| 1 | 92.70% | $92,700 |
| 2 | 95.48% | $95,480 |
| 3 | 98.34% | $98,344 |
| 4 | 101.29% | $101,294 |
| 5 | 104.32% | $104,332 |
| 6 | 107.44% | $107,461 |
| 7 | 110.66% | $110,684 |
| 8 | 113.97% | $114,004 |
| 9 | 117.38% | $117,424 |
| 10 | 120.90% | $120,946 |
| 11 | 124.53% | $124,574 |
| 12 | 128.26% | $128,311 |
| 13 | 132.10% | $132,160 |
| 14 | 136.06% | $136,124 |
| 15 | 140.14% | $140,207 |
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| What is the participation rate and how long is it guaranteed? |
The participation rate is the percentage of the increase in the index that will be credited to an equity indexed annuity account value (subject to the cap in some contracts). In other words, if the indexing method in a particular contract determines a 10% return and the participation rate is 60%, the interest credited to the contract is 6% (10% x 60% = 6%).
It is important to know if the participation rate is guaranteed for the entire term of the contract or not. A product on the market may advertise a higher participation rate in comparison to other products, but may be guaranteed for only one year, at which point the company can decrease the rate in following years.
Also, it is important to note that the participation rate is not the “end all” when comparing products. One participation rate may be significantly higher than another, but the indexing method of the two products may also be quite different. It is possible that the lower participation rate may credit a higher rate of interest than the higher participation rate, depending on the method of indexing interest.
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| Is there a minimum participation rate guarantee? |
It is important to know if the participation rate is guaranteed for the entire term of the contract or not. A product on the market may advertise a higher participation rate in comparison to other products, but may be guaranteed for only one year, at which point the company can decrease the rate in following years. If it were not guaranteed for the entire term, it would be important to know if there is a minimum participation rate guarantee. This would assure you that the insurance company could not come back and surprise you with a participation rate that is lower than you could possibly expect.
Also, it is important to note that the participation rate is not the “end all” when comparing products. One participation rate may be significantly higher than another, but the indexing method of the two products may also be quite different. It is possible that the lower participation rate may credit a higher rate of interest than the higher participation rate, depending on the method of indexing interest.
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| Does my contract have an interest rate cap? What is it? |
A “cap rate” is the maximum amount of interest that can be credited to an equity indexed annuity contract.
Example: 70% Participation Rate with an 8% Cap
Interest determined by indexing method for a given year is 15%
So...
15% (interest) x 70% (participation rate) = 10.5% (before the cap) = 8% (after the cap)
8% is the interest actually credited to the annuity.
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| What method of interest indexing is used? |
The indexing method means the approach used to measure the amount of change, if any, in the index. Some of the most common indexing methods, which are explained more fully later on, include annual reset (ratcheting), high-water mark and point-to-point.
Annual Reset
Index-linked interest, if any, is determined each year by comparing the index value at the end of the contract year with the index value at the start of the contract year. Interest is added to your annuity each year during the term.
High-Water Mark
The index-linked interest, if any, is decided by looking at the index value at various points during the term, usually the annual anniversaries of the date you bought the annuity. The interest is based on the difference between the highest index value and the index value at the start of the term. Interest is added to your annuity at the end of the term.
Low-Water Mark
The index-linked interest, if any, is determined by looking at the index value at various points during the term, usually the annual anniversaries of the date you bought the annuity. The interest is based on the difference between the index value at the end of the term and the lowest index value. Interest is added to your annuity at the end of the term.
Point-to-Point
The index-linked interest, if any, is based on the difference between the index value at the end of the term and the index value at the start of the term. Interest is added to your annuity at the end of the term.
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| Is interest simple or compounded? |
| Some annuities pay simple interest during an index term. That means index-linked interest is added to your original premium amount but does not compound during the term. Others pay compound interest during a term, which means that index-linked interest that has already been credited also earns interest in the future. In either case, however, the interest earned in one term is usually compounded in the next. |
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| Does my contract have moving parts? |
| Of the many components of equity indexed annuities (participation rate and cap rate specifically), it is important to know up front whether or not they are guaranteed for the entire term so that there are no surprises in the future. An insurance company can change the very features that sold you on the product in the first place if they are not guaranteed. |
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| How does an equity indexed annuity compare to a variable annuity? |
| Apples and oranges. You may often see comparisons of equity indexed annuities to variable annuities, or even mutual funds, but they are quite different. Keep in mind that equity indexed annuities are fixed annuities (there are some variable on the market, however), so to compare them to variable products or securities would not be a fair assessment. Fixed indexed annuities include minimum guarantees and are intended for the conservative investor that is seeking returns that could possibly outperform regular or traditional fixed annuities. |
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