How to Read an Equity Indexed Annuities' Contract

Equity indexed annuities can be a good tool to use whenever you are trying to plan for your retirement. If you are considering purchasing this type of annuity, you will want to make sure that you review the contract closely. Here are the basics of how to read an equity indexed annuities contract.

Financial Index

With an equity indexed annuity, the return that you earn from your annuity is going to be tied to a financial index. It is important that you understand which index you are using with the annuity that you are purchasing. For example, your annuity might be tied to the performance of the S&P 500. This means that if the S&P 500 does well, your annuity performance is also going to do well. It is good to know what financial index you are following so that you can pay attention to the performance of that index.

Participation Rates

You should also make sure that you find out if there are any participation rates with your annuity. Many equity indexed annuities have a participation rate that allows you to only benefit from a certain percentage of the movement in a financial index. For example, if your participation rate was 90 percent, and the financial index increased by 10 percent, you are only going to be able to receive 9 percent into your account. 

Surrender Fees

You should also make sure that you understand what would happen if you surrender the annuity before it reaches maturity. Typically, whenever you purchase an annuity, there will be a certain number of years that you will have to wait before you can avoid penalty when cashing out the annuity. If something happens and you need to cancel the contract, you do not want to have to lose a big portion of your savings.

Interest Rate Caps

With many equity indexed annuities, the company is also going to impose an interest rate cap to what you can earn. For example, they might put an interest rate cap of 7 percent on your annuity. This means that if the financial index increases by 20 percent, you are still only going to have 7 percent credited to your account. You should try to find an annuity provider that does not have an interest rate cap or has a very high one.


When reading the equity indexed annuity contract, you will also want to make sure that you understand how the fee structure works. Every insurance company is going to charge you differently for this type of annuity, but you will pay them in one way or another. They might take a certain percentage of each payment that you give them upfront. They might also charge you a margin on the performance of the index. For example, if the contract says that there is a 2 percent margin and the index gives you a 5 percent return, the company is going to take 2 percent and leave you with 3 percent. 

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