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What are equity-indexed annuities?

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Quick Answer

According to CNN Money, equity-indexed annuities are those that have characteristics of both variable and fixed annuities. U.S. News & World Report states these annuities offer more risk and return than a fixed annuity, but less risk and less return than a variable annuity. There is a guaranteed minimum return, but part of the return is also tied to a benchmark like Standard & Poor's 500, per the Illinois Department of Insurance.

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Full Answer

While equity-indexed annuities might sound appealing to investors, especially those who are close to retirement, there are some questions investors should consider prior to making a purchase. It is best to first determine what the guaranteed minimum return is and how good the guarantee is, notes U.S. News & World Report. The insurance company that is issuing the annuities also provides the guarantees.

Since a portion of the returns is tied to a market index, investors should also find out which market index is used. Some examples are the Russell 2000 for small-cap stocks and the Europe, Australasia, Far East (EAFE), which is a foreign stock index. In addition, investors should determine which tracking method is used on the index. One common example is the point-to-point method, but different ways of tracking might impact the return on the annuity.

Investors should also inquire if they're able to withdraw funds early, if needed. Removing funds before the annuity matures results in a reduction of principle. This, in turn, could cause surrender charges and other penalties to be accrued.

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