EIA's allow you to participate in the growth of the stock market, lock in those gains each and every year they occur...but, allow you to avoid the losses in years when the market declines...and the companies put it in writing...and each and every state insurance commission has approved the concept and associated products for sale in their respective states.
How can they promise that? When you buy an EIA, you are actually buying two items. First, by far the vast majority of your money goes into a safe, secure investment such as a AAA corporate bond or government bond. A tiny fraction of your money goes to purchase options on the S&P 500*. Let's look at a real life example:
Joe and Mary Smith have $100,000 to invest. They decide to purchase an Equity Indexed Annuity. When the company receives their money, it buys a AAA corporate bond with $96,000 of the money. The other $4,000 is used to pay for start-up costs and to buy options on the S&P 500*.
Now let us assume a year goes by and the S&P 500 is up 10% for the year. The company looks around, sees the market up 10% and exercises its option to buy the S&P 500 at the price it was a year ago. The company then immediately sells the contract and realizes a profit of 10% which it passes along to you.
Now let us assume the year goes by but the S&P 500* looses 10% of its value. The company then looks around, sees the market down 10% and declines to exercise the option to buy the S&P 500. It would be foolish for the company to buy the S&P 500 at a higher price than it could today and then immediately sell it for a loss. Herein lies the beauty of options. They give the purchaser the right but not the obligation to buy at the one-year-ago price.
What happens next: Well...one year has gone by. Either the options were exercised or not. In either event, the $96,000 invested in the AAA corporate bond earned interest. Let's say it earned 4.1% interest for the year. The bond is now worth $99,936.00. The company then takes a small part of this bond money, buys options on the S&P 500*, and plays the game all over again for another year. And the company does this each year after year after year.
Annuities can only be issued by life insurance companies. (But there is no life insurance connected with them.)
EIA's are simply the safest way to participate in the stock market available to date. Consider them as an option for: "Money I simply don't want to lose."
