Table of Contents:
Equity-indexed annuities offer investors a return that varies according to the performance of a set index, such as the S&P 500. Equity-indexed annuities will credit additional interest to the investor's account based on the contract's participation rate. If a contract sets the participation rate at 70 percent of the return for the S&P 500 index, and the index returns 5 percent, the investor's account will be credited for 70 percent of the return, or 3.5 percent. Equity index annuities may also set a floor rate and a cap rate for the contract. The floor rate is the minimum interest rate that will be credited to the investor's account. The floor rate may be zero or it may be a positive number depending on the specific contract. The contract's cap rate is the maximum rate that will be credited to the contract. If the return of the index exceeds the cap rate, the investor's account will only be credited up to the cap rate. If the S&P 500 index returns 11 percent and the cap rate set in the contract is 9 percent, the investor's account will only be credited 9 percent.
ANNUITY PURCHASE OPTIONS
An investor may purchase an annuity contract in one of three ways:
• Single-payment deferred annuity
• Single-payment immediate annuity
• Periodic-payment deferred annuity
SINGLE-PAYMENT DEFERRED ANNUITY
With a single-payment deferred annuity, the investor funds the contract completely with one payment and defers receiving payments from the contract until some point in the future, usually after retirement. Money being invested in a single-payment deferred annuity is used to purchase accumulation units. The number and value of the accumulation units varies as the distributions are reinvested and the value of the separate account's portfolio changes.
SINGLE-PAYMENT IMMEDIATE ANNUITY
With a single-payment immediate annuity, the investor funds the contract completely with one payment and begins receiving payments from the contract immediately, normally within 60 days. The money that is invested in a single-payment immediate annuity is used to purchase annuity units. The number of annuity units remains fixed and the value changes as the value of the securities in the separate account's portfolio fluctuates.
PERIODIC-PAYMENT DEFERRED ANNUITY
With a periodic-payment annuity, the investor purchases the annuity by making regularly scheduled payments into the contract. This is known as the accumulation stage. During the accumulation stage, the terms are flexible and, if the investor misses a payment, there is no penalty. The money invested in a periodic payment deferred annuity is used to purchase accumulation units. The number and value of the accumulation units fluctuate with the securities in the separate portfolio.