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Equity Indexed Annuities

Equity indexed annuities are one of the hottest insurance products being brought to market today. Equity indexed annuities offer the customer a guaranteed minimum return in the stock market in exchange for a ceiling on returns.

Because equity indexed annuity returns are tied to indexes of market activity and not to the performance of individual stocks or funds, they have not been considered an investment product subject to U.S. Securities and Exchange Commission oversight. Therefore, while variable annuity products must be registered with the SEC, must issue prospectuses and can only be sold by professionals with securities licenses, Equity indexed annuities are not federally regulated and brokers may not need a securities license to sell them.

Before investing in an annuity, a broker should determine whether or not the investment is suitable given the customer age, investments needs, station in life and risk tolerance. In addition, your Broker should consider:

1. What is the annuity's term?

In general, equity indexed annuities (and other annuities, for that matter) require tying up your money for anywhere from five to 10 years. Like any stock-market investment, however, the shorter the term, the greater your risk that the market won't perform well over the holding period.

2. What exactly does the customer earn when the market goes up?

Equity indexed annuities credit you with anywhere from 50 to 100 percent of the price gain of the market — excluding dividends. Since you're not earning dividends, you won't earn as much as you might by investing directly in the market. The percentage rate you earn (called the participation rate) may change from year to year. This should be disclosed by your broker.

3. At the end of the term, how does the company calculate your gain?

There are five methods of indexing gains. Some equity-indexed annuities use the market price on the day your annuity matures. Others look at the market price on each policy anniversary and pick the highest one. Some policies credit you with a portion of each year's market gains — if there are any. Others simply average the gains.

4. Are there any limits to how much you can earn?

Sometimes, equity indexed annuities put a cap on how much you can earn during the year.

5. What happens if stock prices decline?

This depends on how your annuity is indexed. In general, if the stock market goes down, you may not earn as much or maybe nothing at all.

6. What happens if you need liquidity and are forced to cash the annuity early?

Some policies will give you the guaranteed minimum return, while others will credit you with all or even part of your earnings, minus whatever surrender fee was established when you bought the policy. Getting out early may mean taking a loss. In addition, surrender charges can be significant.