Pros and Cons of Equity-Indexed Annuities

The typical EIA provides far less than 100% of the index's return…First…most EIAs have participation rates….between 70 and 90 percent, [second is] through the use of an annual cap–the maximum rate at which the annuity can be credited. For example, the S&P 500 rose almost 29 percent in 2003 [but] an EIA might have limited the gain to…perhaps 12 percent, less…expenses. [Third, dividends don't count toward payout, only the price change of the index. Fourth is] the use of a margin fee…For example, in the case of an annuity with a [margin fee] of 3 percent, if the S&P 500 gained 9 percent, the return credited to the annuity would be 6 percent. Fifth…[they use] simple interest instead of compound interest.