Annuities > Equity-Indexed Annuities
Equity-indexed annuities (EIAs) provide a
fixed interest rate with the ability to earn
a percentage of the gains of certain
market-driven indexes, striking a balance
between fixed-rate and variable-rate
annuities.
The participation rate is the percentage of
the index's gain that you receive. These
rates vary, with some companies offering 50
percent and others offering 100 percent or
more; be sure to read the fine print.
While all plans have a participation rate,
how they calculate the index's gains is
varied. The most common methods are:
-
European, or point-to-point, method:
The index on the maturity date is
divided by the index on the issue date
and 1 is subtracted from the result.
This method ignores all fluctuations
between start and finish. Market
fluctuations can produce very different
results for customers who bought the
policy just a few days apart.
-
Asian method: The beginning and
ending indices is determined by
averaging several points of the index.
It helps protect consumers from the risk
of a market decline near the maturity
date.
-
Look-back or high-water-mark method:
The highest of the index levels on each
policy anniversary is taken and figured
as the index level on the maturity date.
-
Low-water-mark method: The lowest
of the indices on each of the policy
anniversaries before maturity is used as
the level of the index at issue. This
method tends to lower the effect of
market decline.
-
Annual reset method: This method
is also known as the cliquet or ratchet
method, and it is among the most
complicated. Comparing the indices on
the beginning and ending anniversaries
calculates the increase in the index
each policy year. Any resulting
decreases are ignored. Finally, the
increases for each policy year are added
or compounded.
