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Equity-indexed annuities

 

The equity-indexed annuity is an alternative to the fixed-rate annuity and certificate of deposit. Equity indexed annuities offer guaranteed interest rates and the ability to earn money based on certain market-driven indexes. It is a combination of fixed-rate and variable-rate annuities.

The percentage of the index's gain that you receive is referred to as a "participation rate." These rates can range from 50% to 100% or more. Make sure you read the fine print to determine your contacts participation rate.

There are many ways the index-linked returns are calculated, including:

" The Asian method - This method involves the averaging of several points of the index to establish a beginning and ending index. This method will help protect a consumer form the risks of market decline. Some companies take an average of the 12 monthly indices to determine the policy's maturity index level.

" The European method - This method is also known as the point-to-point method. It divides the index on the maturity date by the index on the issue date and subtracts "1". This ignores the fluctuations of start and finish. The European method is the easiest method to calculate and understand. However, it is subject to market fluctuations.

" The look-back method - This method notes the index level on each policy anniversary. The highest level noted is figured as the index level on the maturity date.

" The low-watermark method - The low-watermark method notes the lowest of the indices on each policy anniversary before maturity as the level of the index at issue. This method lessens the risk of a declining market.

" The annual reset method - This method is one of the most complicated to calculate. The increase in the index is calculated each policy year through comparing the indices on the beginning and ending anniversaries. The resulting decreases are ignored. Appreciation is figured by adding the increases for each policy year.