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Since every Equity-Indexed Annuity is different, be prepared to ask your
agent or broker plenty of questions before deciding if you should invest.
Here are seven important questions to ask:
1. What is the annuity's term?
In general, equity-indexed annuities (and other annuities, for that matter)
require you to tie up your money for anywhere from five to 10 years. Like
any stock market investment, the shorter the term, the greater your risk
that the market won't perform well over the holding period. Need
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2. What exactly do you earn when the market goes up?
Equity-indexed annuities credit you with anywhere from 40 to 100 percent
of the price gain of the market — excluding dividends. Since you're not
earning dividends, you may not earn as much as you might have by investing
directly into the market. The percentage rate you earn (called the participation
rate) may change from year to year. Make sure you check with your agent.
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3. At the end of the term, how does the company calculate your gain?
Some equity-indexed annuities use the market price on the day your annuity
matures. Others look at the market price on each policy anniversary and
pick the highest one. Some policies credit you with a portion of each
year's market gains — if there are any. Others simply average the gains.
Make sure you ask which method the policy you're considering uses.
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4. Are there any limits to how much you can earn?
Often equity-indexed annuities put a cap on how much you can earn during
the year. (Some policies also allow the company to change the cap each
year.) If, for example, your plan has a 12 percent cap and the market
rises 15 percent, you can only get 12 percent for that year. Remember
the cap can be adjusted up or down.
5. What happens if stock prices decline?
If the market drops one year, you'll be credited with no gain that year
and will incur no loss. (Of course, if you "surrender" before
the maturity date, you'll have to pay the surrender charge, so you may
end up taking a loss.) The crediting method the company uses will determine
what happens in subsequent years, especially if the market doesn't return
to previous levels. Need
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6. What happens if you want to quit the annuity early?
Some plans will give you the guaranteed minimum return, while others will
credit you with all or even part of your earnings, minus whatever surrender
fee was established when you bought your plan. Getting out early may mean
taking a loss. Some companies may give you the option to take partial
withdrawal over time and thus avoid fees and losses. Need
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7. What if everything crashes?
Equity-indexed annuities do carry a guaranteed minimum return, but generally
only if you keep the plan until its maturity date. The guaranteed return
is usually at least 3 percent. Different companies credit the minimum
interest rate differently. In other words, some companies will credit
your minimum interest on 100% of your deposit some may credit your interest
on less (sometimes 90% of your deposit.) Irregardless, by the time your
plan matures, even if the market has not gone up, you are guaranteed a
full return of principal plus some interest. Make sure to ask about your
choices and the benefits of the different crediting methods. Need
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