What Are Equity Index Annuities? There is a new class of annuity that provides a portion of market index performance with a no-loss provision. It is known as the equity index annuity. This new type of annuity is not a security, as you might suspect, but it is classified as a single-premium traditional annuity. It is an annuity because it meets the strict insurance department requirements for interest guarantees and guarantees against loss of principal, and it provides traditional annuity benefits. Let’s look at what makes this such an attractive savings option.No-Loss ProvisionThe first and possibly most-attractive provision of equity index annuities is the no-loss provision. This means that once a premium payment has been made or interest has been credited to the account, the account value will never decrease below that amount. This provides safety against the volatility of the market index to which the annuity is linked.Interest GuaranteesThe next benefit that appeals to many people is interest guarantees. Most policies have a cap (the maximum interest rate that can be credited to a policy in a policy year) and a floor (the minimum interest rate that can be credited in a policy year). The cap rate can vary from no cap to a fixed percentage, but the floor is generally zero. This allows the policyholder to benefit from potentially high returns and be guaranteed at the same time that no money will be lost.Competitive Rates of ReturnWith concerns over inflation and making sure that investments will meet our future needs, many people have turned to the equity market for higher returns. It makes sense when you consider how well the S&P 500 index has performed historically.Traditional Annuity BenefitsEquity index annuities offer the same benefits as traditional annuities. Notable among these are tax-deferred growth and early withdrawal of funds without penalty. This early withdrawal is usually conditioned upon the annuitant’s death or admittance to a nursing home.Note that most annuities have surrender charges which are assessed in the early years of the contract if the owner surrenders it before the company has had the opportunity to recover its costs. The earnings portion of withdrawals are taxable as ordinary income and, if made prior to age 59 ½ are subject to a 10 percent federal tax penalty.Equity index annuities typically offer other benefits that are not generally included in traditional policies: a 100 percent money-back guarantee, no front-end sales charges, and no annual management fees. Equity index annuity values fluctuate with changes in market conditions.Of course, EIAs are not appropriate for every investor. Participation rates are set and limited by the insurance company. So an 80 percent participation rate means that only 80 percent of the gain experienced by the index for that year would be credited to the contract holder. Also, like most annuity contracts, EIAs have certain rules, restrictions, and expenses. Some insurance companies reserve the right to change participation rates, cap rates, the spread/asset/margin fees or other fees either annually or at the start of each contract term. These types of changes could affect the investment return. It is prudent to review how the contract handles these issues before deciding whether to invest.Guarantees are provided by the issuing insurance company. The performance of any index is not indicative of the performance of any particular investment. Individuals cannot invest directly in any index. Past performance is no guarantee of future results.