Equity Indexed Annuity
product that provides the long term potential growth of the stock market,
with the downside guarantees of an annuity.
- GUARANTEE - NO LOSS PROVISION
- This means that once you make a premium payment you
will never have less in your account than your premium payment.
- This means that once interest has been credited to your equity
index annuity the value of your annuity will never decrease unless you make a
withdrawal... even if the stock market goes down.
- LONG TERM STOCK MARKET GROWTH
- This means that the Interest Rate set by the insurance company
at the end of each policy year is based on the performance of the S&P 500 Index. The
method by which the interest rate is calculated and the percentage of the gain of the
S&P 500 Index that is credited to your annuity is referred to as the Participation
Glossary of Terms
The following are terms used in describing what an Equity Index Annuity is and how the
interest rate is calculated.
- Cap - The Maximum interest rate that can be
credited to your equity index annuity policy in a policy year or over the term of the
- Compounding of Gains - Interest that is
credited to your policy is added to your principal as well as interest credited in prior
policy years. Some companies do not compound the gains credited to your policy from prior
years. This dramatically reduces the overall rate of return earned by your money.
- Floor - The minimum interest rate that can be
credited to your policy in a year or over the term of your contract.
- Standard & Poors 500 - This is an index
which was devised a number of years ago by the Standard & Poor's Company. Today the
S&P 500 Index is widely regarded as the benchmark index by which U.S. stock market
performance is measured.
- Index Average - Instead of using the
percentage change over the policy year some companies use an averaging method. They
calculate the change by averaging the daily closing S&P 500 values or the monthly
S&P 500 values. The averaging method also tends to lower the overall rate of return of
the S&P 500 Index, similar to that of a "cap". In rising markets the
averaging method limits the increase that would be credited to your annuity policy.
- Highwater Method - Companies that use this
method take the value of the S&P 500 Index on the day your policy is issued and
subtract that value from the highest value the S&P 500 reaches during the term of your
contract. The term of the most commonly used are 5 and 7 year durations. The difference
between the value of the S&P 500 on the day you purchased your policy and the highest
value reached is converted to a percentage. The amount of money you initially deposited in
your policy is multiplied buy their percentage change to arrive at your contract value.
The S&P 500 was at 500 on the day your contract was
issued and over the 5 year term of your contract the highest point the S&P 500 reached
was 700. The gain of 200 S&P 500 points represents a 40% increase. Therefore the
value of your contract would be increased by 40%. An annuity policy with an initial
premium of $100,000 5 years later would be credited with $40,000 of interest.
- Participation Index Rate - The amount of the
percentage change (which is set by the company) and used to determine the amount to be
credited to your policy for that year. If the Participation Index Rate was 90% and the
percentage change of the S&P 500 Index was 10%. Then the 10% change would be
multiplied by the Participation Index Rate of 90% resulting in an Interest Rate
of 9.0% being credited to your policy for that term.
- Percentage Change - The change in the S&P
500 Index from the beginning of the term to the end of the term expressed as a percentage.
The term could be one policy year, 5 policy years or 7 policy years etc. If the S&P
500 was 500 at the beginning of the policy year and closed at 550 at the end of the policy
year, there would have been a 10% increase in the S&P 500 Index. In years where the
S&P 500 Index is negative the percentage credited to your policy is (0). In this case
there would be no change in your policy value.
- Point to Point - This refers to the change in
the S&P 500 Index from the beginning of the term to the end of the term.
The term period may be one policy year or 3, 5 7 policy years.
- Ratchet Method - This method locks in the
gain for that period which is usually one policy year. Once the interest is credited to
your policy it becomes the value on which the next years gain is calculated.
- Spread Method - Companies that use this
method calculate the increase in the S&P 500 for that policy year or term then
subtract a percentage from that change.
For example if
the the gain in the S&P 500 for a policy year was 12% and the company used a spread of
2%, then, 10% would be credited to your policy for that year.