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Contract features of equity-indexed annuities

Equity-indexed annuities are quite complex products that might contain several features that could affect your return. You should fully understand how an equity-indexed annuity computes its index-linked interest rate when you buy. An insurance company might credit you with a lower return than the actual index’s gain. Some of the common features used to calculate an equity-indexed annuity’s interest rate include:

• Participation Rates. The participation rate determines how much of the index’s increase would be used to compute the index-linked interest rate. For example, if the existing participation rate is 80% and the index increases 9%, the return credited to your annuity will be 7.2% (9% x 80% = 7.2%).

• Interest Rate Caps. Some of the equity-indexed annuities set a maximum rate of interest that the equity-indexed annuity could earn. If a contract has an upper limit, or a cap, of 7% and the index linked to the annuity gained 7.2%, only 7% will be credited to the annuity.

• Margin/Spread/Administrative Fee. The index-linked interest for some annuities is resolute by subtracting a percentage from any profit in the index. This fee is sometimes called the “margin,” “spread,” or even “administrative fee.” In the case of an annuity with a “spread” for 3%, if the index gained 9%, the return credited to the annuity will be 6% (9% - 3% = 6%).

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