Equity Index Annuity:

The equity index annuity is a type of annuity wherein an investor will get a return, the magnitude of which is based on the performance of the market. This market is actually a stock index such as S&P 500 or the Standard & Poor’s Index of 500 stocks. However, the risk factor depends upon the participation here. The annuity holder actually gets a certain amount of interest in his account. Over and above this fixed interest, he will also get an additional amount of interest depending upon the participation rate. There is something called an interest cap in this kind of an annuity, where there is a restriction on the additional interest that an annuity holder gets. The annuity holder will not get any further interest over and above this cap, despite the increase in the market rates.

When a conservative investor, one who wants higher rates of interests but doesn’t want to risk his principal amount, invests his money on an equity index annuity, he will surely benefit in two ways. Firstly, he gets a higher average rate of return when compared to a bond, a CD or a fixed income asset. In this kind of annuity, the investor will get to keep a majority of the annual market gains whenever there is a rise in the market index and he doesn’t suffer the loss that occurs from a decline in the same market index. Thus, the average rate of return can be defined as something in between the stocks and the bonds.

Another benefit that a conservative investor gets from investing in an equity index annuity happens to be risk-reduction. Usually investments that involve high risks offer higher rates of return and those that involve lower risks offer lower rates of return. In case of this kind of an annuity, the upper as well as the lower boundaries of these returns get cut off and thus the risk is also reduced. In any case you will not lose out on your principal. If the same investor invests in stocks, he may lose out on his principal and even suffer a major loss, whenever there is a decline in the market index of that particular stock.

An investor who invests in an equity index annuity also gets to enjoy freedom from the active management of an asset. Liquidity provision, waiving of surrender charges in certain critical conditions and tax-deferred annuity gains are the other benefits offered by such an annuity and these should definitely not be overlooked.