Beware the Siren Phone - Using Equity-Indexed Annuities - Handle With Care

Like the mythic siren's call, the message is enticing - an apparently perfect investment.Investors can get into a agreement offering a minimum get back with the potential to recapture the upside of increases in the stock market while avoiding collection worth declines if - and when - the market goes down.This blend of promises can be found in 'equity-Hybrid Index Annuity' or EIAs made available from insurance companies.And these offerings have grown to be popular given the sharp declines in the stock market. In accordance with a study in the WSJ (9/02/09), sales of EIAs through the first 1 / 2 of 2009 rose 20% in comparison with last year to $15.2 billion.As persuasive as these items may seem, they're any such thing but easy. There are lots of complex moving parts to each EIA commitment. So buyer beware!Think of committing as finding the way to your destination (an objective) and matching that with-the ideal mode of transportation (or investment vehicle) to get you-there. You may well be traveling from Boston to New York and can select highways or back streets. You can select hi-speed track, an automobile, a coach, a bicycle or possibly a aircraft. You can drive or travel your self or hire somebody else to drive. All will get you to where you want to go but it is a question of what sort of convenience level you want on the ride, how much time you have to get there and at what expense - in fees or simply just mental health.For individuals who may not have the abdomen for the gyrations of the stock market but are looking to be more venturesome, the EIA may be considered a appropriate compromise.First, realize that an award exists by an insurance carrier and backed by the credit-worthiness and deep pockets of the insurer. There is no FDIC support. This isn't a bank item (even if you find them offered by brokers with desks in banks ).Next, recognize that a list could be any benchmark for any asset class or industry. The most common standards incorporate the Dow Jones Industrial Average (DJIA), the S&P 500 and NASDAQ in the US. International, spiders contain the NIKKEI in Japan for instance.An equity-indexed allowance (EIA) ties the amount which is attributed to an investor's account to the effectiveness 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 'contribution rate' that sets a portion of the index gain that is used.The index-based interest credit might be further restricted by 'limits' that set a maximum amount of gain.For whoever has ever had an Adjustable Rate Mortgage, the method is very similar to how loan charges are recalculated.Calculating the interest credit is further complicated by the way of calculating the change in the index value. For instance, the insurer may determine the index change based on the 'Annual Re-set' - the difference involving the index value at the start and end-of each contract annual wedding date. Or a 'point-to-point' method could be selected that compares the index value at the beginning date with some future date such as the sixth anniversary. Or even the insurer will use 'index averaging' taking numerous index returns and averaging them.By the-way, the index value will not contain changes caused by dividends. While total return around the S&P 500 averaged 9.5% between 2008 and 1969, greater than one-third of-the return was caused by benefits. Therefore these EIA industry contribution formulas will soon be determined on a lower base when dividends aren't considered the main index return.Typically but not always, there's a minimum level of attention that's paid. But remember that this minimum interest credit may not affect a large number of the contract price. It may use a pastime rate of three minutes to only 90% of the benefit. It may apply 1.5% interest to 85% of the whole value. It all depends on the terms of the contract.EIA contracts have twin values: the one based on the index value, contribution rate and cap; the other based on the minimal interest credit. And if you escape the agreement before the full-term, you might be forfeiting the index-based account value. The insurer would then pay-out the sum based on the minimum guaranteed portion which might be less than what you expected compared to the index formula.And just how many baseball fans would be happy if their favorite group was on the 1-yard line and the referees moved the goal post? Properly, most EIA contracts reserve the to unilaterally change terms reducing the participation rate or using firmer lower, limits for example.And most contracts have very sharp surrender expenses that can begin at 10-to 150-200 of the contract price in the first-year and suffering from there for around 1-0 years.And bear in mind of the fiscal rewards that are part of these contracts. Some EIAs provide 'bonuses' to people - a supplementary 5-or one hundred thousand included with the original deposit. But there is no free lunch. As a swap for this kind of reward, the insurer will more than likely raise the surrender fee. So as much as the benefit is definitely an incentive to start the agreement, the penalty is an incentive not to move the money out.Follow the money, also. Several EIAs pay out commissions to agents between 6% and 10% and sometimes more. An entrepreneur must certanly be aware that there might be an incentive by a salesman to present this as a catch-all solution whether it suits the investor's specific situation.The benefits to an EIA range from the opportunity to take part in the benefit of the market index instead to trading straight through mutual funds for instance. There could be less apparent unpredictability because the account balances are not fluctuating wildly, when an individual opens up an annual statement. So this can help a conservative individual dip a foot on the market and rest better. And similar to premium products, traders have free access to a portion of their money without surrender cost (frequently one hundred thousand). And like several other insurance solution, it provides a guaranteed death benefit. Like different annuities, it includes an income stream that you can not outlive.The average return-on such EIA contracts has-been reported to stay the 5%-6% range. Given the complexities of these agreements and the common returns, it may be an expensive way to reduce your market publicity but it may seem sensible for those searching for a principal-protected CD choice for the money part of their portfolios as well as an income source to supplement retirement.