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Equity Index Annuities

The introduction of the "equity-index" has revolutionized the insurance and annuity industry in recent years. Like other tax-deferred annuities, the equity-index annuity is a contract between you and an insurance company; however, it is considered neither a fixed rate nor variable annuity.

Instead, the equity-index annuity forms a so called "hybrid" of these products by combining the safety and certainty of a fixed rate annuity with the upside potential of the overall stock market, similar, but not identical to variable annuities. By definition, the equity-index is a fixed product, meaning that it has no investment risk. While earnings can and do fluctuate during each policy year, they are credited to the annuity on each policy anniversary. Also, you cannot lose principal with an equity-index annuity, as is the case with a variable annuity.

Similar to variable annuity subaccounts, with an equity-index annuity, the annuitant selects from a menu of "asset allocation" accounts to proportion funds. Each of these accounts is based on certain index strategies, ranging from the S&P 500 Index to the Dow Jones Industrial Average. There’s even a Total Stock Market index to choose from, among other Index choices.

Performance of the selected asset allocation account is measured from the date the annuity is issued, then calculated and credited on each policy anniversary. Once credited, interest earnings are then "locked in" and become part of the principal amount, which is guaranteed, regardless of future performance. If performance is negative (at a loss), an alternative, guaranteed rate is then credited, which is usually around 1%. Under no circumstance can an equity-index annuity lose principal, regardless of the performance of the selected asset allocation account.

A "fixed rate" annuity is one variation in a broader family of traditional, tax-deferred annuities. Other varieties of tax-deferred annuities include: variable annuities, equity-indexed annuities and multi-year guarantee annuities. While each of these types of annuities share many similarities, the primary difference between each is the method by which interest is both earned and credited.

A "Variable" annuity is a contract between you and an insurance company. Although it shares many similarities with fixed rate and/or equity-indexed annuities, a variable annuity has three major distinctions from these annuities: risk, fees and often how the death benefits are paid. Setting aside these differences, a variable annuity can look, act and feel much like a more traditional fixed or indexed annuity.

A Single Premium Immediate Annuity (SPIA) is a financial instrument purchased from an insurance company with single premium payment. In exchange for this lump-sum payment, the insurance company agrees to pay the buyer a series of fixed-income payments for life, for a specified period of time or both. Income payments from SPIA's generally begin within 30 days from the date the policy is issued, but can start later.

A Multi-Year Guarantee Annuity (MYGA), also known as a "Fixed Rate Annuity," is a variation of traditional tax-deferred annuity. Just like all other forms of annuities, MYGA's are offered by a variety of different insurance companies. While similar to traditional deferred annuities in many ways, the MYGA was designed to compete with other savings instruments such as bank CD's and Treasury Bills.