An equity-indexed annuity is similar to a fixed annuity in that it guarantees a specified return at specified intervals. However, the characteristic difference of an equity-indexed annuity from a fixed annuity is, as the name suggests, the linkage of the annuity with an index or security in the stock market. Yet, paradoxically, this form of annuity assures a guaranteed income to the annuitant, implying a perennial gain, which is almost an impossible phenomenon. What makes this possible? Of course, the insurance component in the equity indexed annuity. Although your annuity investment is tied to the stock market, you never actually lose because the insurance company takes care that the value of your annuity never drops below a specified amount. Even if there is a boom in the stock market, the insurance company decides what part of the additional payment should be given to you and how. In effect, the insurance company adjusts the value of the equity-indexed annuity at the end of each period and estimates the gain from the linked index. Apart from this characteristic deviation, in most other aspects, the equity-indexed annuity appears similar to the fixed annuity.

Now that you have a guaranteed return from an equity-indexed annuity, the question that becomes unavoidable is what is the rate of return that the annuitant will get for this type of annuity. If you are depositing money for the annuity periodically or before your annuity period starts, the insurance company may pay you returns on the basis of the changes in the stock market or index. Typically, the insurance company guarantees a minimum rate of return, which may vary. However, after the total deposit for the annuity is made and the annuity period starts, the annuitant will be paid back as contracted.

It is important that you understand the features of an equity-indexed annuity before buying it, in order to maximize your gains from it. A few common features required to figure out the rates of return by an equity-indexed annuity are:

Participation Rates that determine the proportion of the increase in the index that will be used to calculate the index-linked interest rate.

Interest Rate Caps are the maximum rates of interest that an equity-indexed annuity can earn. The annuitant will be paid at this rate even if the index has gained at a higher rate.

Margin/Spread/Administrative Fee is a percentage of the index gains that the insurance company keeps aside for itself.

Apart from these, the indexing method followed by an insurance company also constitutes an important feature of the annuity. Selecting an equity-indexed annuity can be tricky and needs proper understanding of how each feature works and how it impacts your returns. For more information on equity-indexed annuities and expert advice on the best selection, Click here or call AnnuityLibrary.com toll-free at 1-800-998-4056. AnnuityLibrary.comis an independent and reliable source of information on equity indexed annuity and is referenced by renowned financial organizations and publications.