The equity indexed annuity is unlike any product in the marketplace. It is a fixed product with a greater potential return than a fixed annuity. The risk of losing your money due to market losses usually does not exist with this financial instrument.

The equity indexed annuity' return is usually based on the performance of a stock related index (e.g. S & P 500 or 400). The instrument has a guaranteed rate of return ( 2 - 4 %) regardless of whether the index does stellar or not. This is not like any other annuity. However there are limitations to the equity indexed annuity. Most will have a limit on the amount of gain you can receive in a given year. Also, those with higher guaranteed rates usually have longer surrender charges up to 10 years. Usually the cap or the most you can gain is around 10-14%. In some instances, there is a participation rate which determines how much of the total return you are entitled to. For example, if the S & P 500 return is 10% (your maximum eligible return is 10%), your participate rate is 70%, your annuity would only be credited 7% (This is assuming there are no administrative fees).

The equity indexed annuity is a very interesting instrument. It normally offers a guaranteed rate of return regardless of the economic climate and its return is based on an index. The limit on what you can gain, and the participation rate may vary from company to company.

*Disclaimer: Always consult a tax advisor or financial advisor when making investment decisions.

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