Understanding the Limitations of Equity Indexed Annuities

Investing in equity indexed annuities can provide you with a way to create income for yourself upon retirement and take advantage of some movement in the stock market. However, this type of investment can limit your returns overall. Here are a few ways that equity indexed annuities limit returns.

1. Interest Rate Caps

Most equity indexed annuities have interest rate caps that you will have to deal with. This means that even if the financial index that your annuity is tied to increases in value by 15 percent, you might only be able to get 10 percent improvement in your account. This puts a maximum amount of money that you can earn on your account.

2. Participation Rates

In addition to having interest rate caps, your annuity provider might also have a participation rate. This means that the annuity is only going to participate in the changes in the market up to a certain extent. For example, if your annuity has a 70 percent participation rate, if the index increases by 10 percent, you will only earn 7 percent. 

3. Do Not Include Dividends

Most of the time, annuity companies do not include returns from dividends in the market. They only allow you to benefit from capital gains.