Beware the Siren Call - Applying Equity-Indexed Annuities - Handle Carefully

Like the mythological siren's call, the frequency is enticing - a relatively perfect investment.Investors can get right into a contract offering a minimum reunite with the potential to fully capture the upside of increases in the stock market while preventing profile worth declines if - and when - the market moves down.This mixture of guarantees can be observed in 'equity-Indexed Annuity' or EIAs offered by insurance companies.And these products have grown to be popular given the sharp declines in the stock market. According to a report in the WSJ (9/02/09), revenue of EIAs during the first half 2009 rose 20% compared to this past year to $15.2 billion.As persuasive as these products might seem, they are anything but easy. There are lots of challenging moving parts to each EIA commitment. So customer beware!Think of matching that with the proper mode of travel (or investment vehicle) to have you there and trading as locating the way to your location (a goal). You might be traveling from Boston to Nyc and may pick highways or back streets. It is possible to select hi-speed railroad, a car, a bus, a bicycle or perhaps a airplane. You can drive or fly yourself or hire another person to drive. All will get you to where you want to move but it's a problem of what sort of comfort level you want on the experience, how much time you have to get there and at what expense - in fees or simply mental health.For those who may not have the abdomen for the gyrations of the stock exchange but are seeking to be more venturesome, the EIA may be described as a suitable compromise.First, recognize that an award is offered by an insurance company and guaranteed by the credit-worthiness and deep pockets of the insurer. There is no FDIC support. This isn't a bank item (while you might find them sold by agents with workstations in banks ).Next, understand that a list can be any benchmark for any asset class or market. The most typical standards include the Dow Jones Industrial Average (DJIA), the S&P 500 and NASDAQ in the usa. Overseas, spiders include the NIKKEI in Japan for instance.An equity-indexed premium (EIA) ties the amount that'll be awarded to an account to the efficiency of a specific index.But do not expect to get a one-for-one increase in-your account value based on the index's increase. Alternatively, these agreements include a 'participation rate' that sets a percentage of the index gain that is used.The index-based interest credit could be further limited by 'caps' that set a amount of gain.For whoever has ever had an Rate Mortgage, the method is quite much like how loan rates are recalculated.Calculating the interest credit is further complicated by the way of calculating the change in the index value. For example, the insurer may determine the index change based on the 'Annual Re-set' - the difference between your index price at the beginning and end-of each deal annual anniversary date. Or possibly a 'point-to-point' method might be chosen that compares the index value in the beginning date with some future date such as the sixth anniversary. Or even the insurer will use 'index averaging' taking multiple index returns and averaging them.By the way, the index value will not contain changes caused by 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 related to dividends. Therefore these EIA industry engagement supplements will soon be determined on the lower base when returns are not considered area of the index return.Typically but not always, there's a minimum quantity of attention that's attributed. But know that this minimum awareness credit might not connect with a huge number of the contract value. It may utilize an interest rate of 3% to only 90% of-the price. It could use 1.5% interest to 85% of-the whole price. It all depends on the terms-of the contract.EIA agreements have twin values: the one based on the index price, contribution rate and cap; the other based on the minimal interest credit. And if you get out of the contract prior to the full-term, you could be forfeiting the index-based account value. The insurer would then pay out the sum based on the minimum guaranteed part which may be less than everything you expected when compared with the listing formula.And just how many football fans would be happy if their favorite team was on the 1-yard line and the referees shifted the goal post? Well, most EIA contracts hold the right to unilaterally change terms reducing the participation rate or using stiffer lower, limits for example.And most contracts have very large surrender fees that can start at 10% to 15-mile of the contract value in the first year and decreasing from there for around 1-0 years.And take note of the financial rewards that are part of these contracts. Some EIAs provide 'bonuses' to people - a supplementary 5% or 10% included with the first deposit. But there is no free lunch. In exchange for this kind of reward, the insurer will likely boost the surrender penalty. So as much as the advantage can be an incentive to start the contract, the fee is an incentive to not go the money out.Follow the money, too. Many EIAs pay-out commissions to brokers between 6% and 10% and sometimes more. An entrepreneur must be aware that there could be a motivation by a salesman to provide this as a catch-all answer whether it matches the investor's specific situation.The advantages to an EIA range from the opportunity to participate in the benefit of the market index instead to trading immediately through mutual funds for instance. When a buyer opens up an annual statement, there may be less evident unpredictability because the account balances are not fluctuating wildly. So this may help a careful individual dip a foot on the market and sleeping better. And like the majority of premium goods, people have free access to some of their money without surrender charge (usually 10 %). And like every other insurance product, it offers a guaranteed death benefit. Like different annuities, it includes money flow that you can't outlive.The average return on such EIA agreements has-been reported to be in the 5%-6% range. Given the complexities of these deals and the average results, it may be an expensive way to reduce your industry exposure but it may seem sensible for those searching for a principal-protected CD substitute for the cash portion of their portfolios along with a revenue stream to supplement retirement.