Beware the Alarm Phone - Using Equity-Indexed Annuities - Handle Carefully

Like the mythical siren's call, the frequency is enticing - a seemingly perfect investment.Investors can get into a contract supplying a minimum return with the potential to recapture the upside of increases in the stock market while avoiding account worth declines if - and when - the market moves down.This blend of claims can be observed in 'equity-Whole Life' or EIAs made available from insurance companies.And these products are becoming common given the large declines in the stock market. In accordance with a report in-the WSJ (9/02/09), revenue of EIAs during the first 1 / 2 of 2009 rose 20% in comparison with this past year to $15.2 billion.As convincing as these items may appear, they are anything but simple. There are many complicated moving elements to each EIA contract. So consumer beware!Think of coordinating that with the appropriate method of transportation (or investment vehicle) to have you there and committing as locating the way to your location (a goal). Maybe you are traveling from Boston to Ny and could pick roads or back roads. You can choose hi-speed rail, an automobile, a bus, a bicycle or perhaps a airplane. It is possible to drive or travel your self or hire another person to drive. All can get you to wherever you want to move but it's an issue of what kind of convenience level you want on the journey, how much time you have to get there and at what price - in fees or simply just mental health.For individuals who may not have the stomach for the gyrations of the stock exchange but are looking to become more venturesome, the EIA may become a acceptable compromise.First, realize that an annuity is offered by an insurance company and reinforced by the credit-worthiness and deep pockets of the insurer. There's no FDIC assistance. This is not a bank item (although you may find them sold by agents with tables in banks ).Next, understand that a catalog could be any benchmark for any asset class or industry. The most common benchmarks contain the Dow Jones Industrial Average (DJIA), the S&P 500 and NASDAQ in the usa. International, indexes contain the NIKKEI in Japan for instance.An equity-indexed premium (EIA) ties the sum which is paid to an investor's account to the performance of-a specific index.But don't be prepared to receive a one-for-one increase in-your account value based on the index's increase. Alternatively, these contracts include a 'contribution rate' that sets a portion of the index gain that is used.The index-based interest credit could be further restricted by 'hats' that set an optimum amount of gain.For those who have ever had an Adjustable Rate Mortgage, the method is quite similar to how loan rates are recalculated.Calculating the interest credit is further complicated by the way of calculating the change in the index value. As an example, the insurer can determine the index change in line with the 'Annual Reset' - the-difference between your index price at the start and end-of each agreement annual wedding date. Or even a 'point-to-point' process could be opted for that compares the index price in the beginning date with some future date just like the sixth anniversary. Or even the insurer will use 'index averaging' getting numerous index returns and averaging them.By just how, the index value will not include changes resulting from dividends. While overall return around the S&P 500 averaged 9.5% between 1969 and 2008, significantly more than one-third of-the return was attributed to benefits. So these EIA market contribution supplements will soon be computed on the lower platform when returns aren't considered area of the index return.Typically but not often, there is a minimum quantity of interest that's credited. But remember that this minimum interest credit might not connect with hundreds of the contract price. It might use an interest rate of three full minutes to only 90% of-the value. It may utilize 1.5% attention to 85% of the total price. It all depends on the terms of the contract.EIA contracts have twin values: the one based on the index price, participation fee and cap; the other based on the minimal interest credit. And if you escape the agreement ahead of the full term, you may be forfeiting the index-based account value. The insurer would then pay out the volume based on the minimum guaranteed part which may be less than everything you expected when compared with the catalog formula.And how many football fans would be happy if their favorite team was on the 1-yard line and the referees shifted the goal post? Properly, most EIA contracts hold the right to unilaterally change conditions reducing the contribution rate or using stiffer lower, limits for example.And most contracts have very large surrender charges that can begin at 10% to 15-minute of the contract price within the first year and decreasing from there for around 10 years.And be aware of the economic rewards that are part of these contracts. Some EIAs provide 'bonuses' to traders - a supplementary 5-or 10 % put into the original deposit. But there's no free lunch. In trade for this kind of bonus, the insurer will more than likely boost the surrender charge. So as much-as the reward is an incentive to start the agreement, the punishment is an incentive to not move the money out.Follow the money, too. Many EIAs spend commissions to brokers between 6% and 10% and sometimes more. An investor must be aware that there may be an incentive by a merchant to present this as a catch-all option whether or not it suits the investor's particular situation.The benefits to an EIA range from the opportunity to take part in the upside of the market index as an alternative to trading immediately through mutual funds for instance. There might be less evident volatility because the account balances aren't fluctuating wildly, when an investor opens up an annual record. So this can help a careful investor dip a foot in the market and sleeping better. And similar to annuity products, traders have free use of a portion of these money without surrender charge (frequently one hundred thousand). And like any other insurance product, it provides a guaranteed death benefit. Like other annuities, it offers earnings flow which you can not outlive.The average return on such EIA agreements is reported to stay the 5%-6% range. Given the complexities of these agreements and the typical results, it may be an expensive way to reduce your market exposure but it may make sense for those searching for a principal-protected CD option for the cash portion of their portfolios as well as an income source to supplement pension.