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

Like the mythic siren's call, the frequency is enticing - an apparently perfect investment.Investors can buy right into a contract offering a minimum reunite with the potential to fully capture the benefit of increases in the stock market while avoiding portfolio value declines if - and when - the market goes down.This mixture of guarantees can be observed in 'equity-indexed growth' or EIAs provided by insurance companies.And these offerings have become popular presented the steep declines in the stock market. According to a report in the WSJ (9/02/09), income of EIAs during the first half of 2009 rose 2005-2011 compared to a year ago to $15.&lt;br /&gt;&lt;br /&gt;2 billion.As engaging as these products may possibly appear, they are such a thing but easy. There are lots of challenging moving parts to each EIA contract. So consumer beware!Think of trading as locating the route to your location (an objective) and coordinating that with all the proper method of transportation (or investment vehicle) to get you there. Perhaps you are traveling from Boston to Ny and could choose highways or back roads. It is possible to pick hi-speed railroad, a vehicle, a coach, a bike or possibly a plane. It is possible to drive or fly yourself or hire another person to drive.&lt;br /&gt;&lt;br /&gt; All will get you to where you want to go but it's a problem of what form of comfort 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 stomach for the gyrations of the stock exchange but are seeking to be more venturesome, the EIA may be a acceptable compromise.First, recognize that an annuity exists by an insurance company and backed by the credit-worthiness and deep-pockets of the insurer. There's no FDIC backing. This is not a bank product (while you might locate them sold by brokers with desks in banks ).Next, recognize that a list can be any standard for any asset class or market. The most common benchmarks incorporate the Dow Jones Industrial Average (DJIA), the S&P 500 and NASDAQ in america.&lt;br /&gt;&lt;br /&gt; Overseas, spiders contain the NIKKEI in Japan for instance.An equity-indexed allowance (EIA) ties the amount that'll be credited to an investor's account to the effectiveness of a particular index.But do not be prepared to receive a one-for-one increase in your account value-based on the index's increase. Rather, these agreements include a 'participation rate' that sets a share of the index gain that is used.The index-based interest credit might be further restricted by 'caps' that set a maximum amount of gain.For anyone who has ever endured an Adjustable Rate Mortgage, the process is extremely similar to how loan rates are recalculated.Calculating the interest credit is further complicated by the way of measuring the change in the index value.&lt;br /&gt;&lt;br /&gt; As an example, the insurer can determine the index change in line with the 'Annual Reset' - the difference involving the index value in the beginning and end of each contract annual wedding day. Or a 'point-to-point' method might be opted for that compares the index value at the beginning date with some future date just like the fifth anniversary. Or perhaps the insurer will use 'index averaging' taking multiple index returns and averaging them.By the way in which, the index value will not contain changes resulting from benefits. While full return on the S&P 500 averaged 9.5% between 1969 and 2008, significantly more than one-third of the return was related to dividends. So these EIA industry contribution formulations will be calculated on the lower starting when returns aren't considered area of the index return.&lt;br /&gt;&lt;br /&gt;Typically although not always, there is the absolute minimum amount of attention that's paid. But remember that this minimum interest credit might not apply to 100% of the contract price. It could apply an interest rate of three years to only 90% of the worth. It may apply 1.5% curiosity to 85% of the sum total value. Everything depends on the terms of the contract.EIA contracts have twin values: the one based on the index value, participation rate and cap; the other based on the minimum interest credit.&lt;br /&gt;&lt;br /&gt; And if you get out of the agreement ahead of the full-term, you might be forfeiting the index-based account value. The insurer would then pay out the volume based on the minimum guaranteed portion which can be lower than everything you expected compared to the index formula.And just how many soccer fans would be pleased if their favorite team was on the 1-yard line and the referees moved the goal post? Properly, most EIA contracts reserve the right to unilaterally change terms lowering the participation rate or using stiffer lower, caps for example.And most contracts have very steep surrender charges that can start at 10 % to 153-unit of the contract value within the first year and decreasing from there for up-to 10 years.And bear in mind of the monetary incentives that are part of these contracts. Some EIAs provide 'bonuses' to buyers - an extra 5% or 10% added to the original deposit. But there's no free lunch.&lt;br /&gt;&lt;br /&gt; As a swap for this type of benefit, the insurer will probably boost the surrender penalty. Whilst much as the bonus is definitely an incentive to start the agreement, the fee can be an incentive not to move the money out.Follow the money, too. Several EIAs pay-out commissions to brokers between 10% and 6% and sometimes more. An individual should be aware that there could be an incentive by a salesperson to present this as a catch-all solution whether or not it satisfies the investor's specific situation.The advantages to an EIA range from the opportunity to take part in the benefit of a market index as an alternative to committing immediately through mutual funds for instance. because the account balances are not fluctuating wildly when a buyer opens up an annual statement, there might be less apparent volatility.&lt;br /&gt;&lt;br /&gt; Which means this can help a conservative investor dip a toe available in the market and sleep better. And like the majority of annuity items, investors have free use of some of these income without surrender fee (often 10 %). And like several other insurance product, it gives a guaranteed death benefit. Like other annuities, it offers earnings flow which you can not outlive.The average return on such EIA contracts continues to be reported to be in the 5%-6% array. Given the difficulties of these contracts and the typical results, it may be an expensive way to restrict your market exposure but it may make sense for those looking for a principal-protected CD alternative for the money portion of their portfolios along with a revenue stream to supplement retirement.