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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.
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