The Advantages and Disadvantages of Equity Index Annuities
VanderPal, G. (2004). The advantages and disadvantages of equity index annuities. Journal of Financial Planning, 17(1), 56-62.
Posted: 28 Apr 2017
Date Written: Jan 1, 2004
Equity index annuities combine the safety of a standard fixed annuity with returns linked to an investment index. EIAs, which come in many variations, have advantages and disadvantages. Studies show that EIAs typically out-perform certificate of deposits and taxable bond mutual funds, but not stock indexes over the long term. There are over 120 equity index annuities and about 40 crediting methods. EIAs are ideal for clients who want to participate in market returns yet are uncomfortable with market risk. EIA portfolios are a combination of targeted maturity investment grade bonds and a European Call Index Option, which is a derivative security based on the underlying increase in value of an index over time with a set end date for exercise. The article examines 3 major crediting methods - point to point, high water point and averaging - as well as numerous variations that can affect performance, such as annual reset, caps, minimum guarantees, participation rates and bonuses.
Keywords: insurance, annuities, index annuites, risk management, equity index annuity, EIA
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