EIA's Or FIA's
Both EIA's (Equity Index Annuity) and FIA's (Fixed Income Annuity) are just that "Fixed Annuities" and are the same--just with a different first name or letters in front. Looking back now I was very fortunate and am very grateful to have been a pioneer in both the marketing of and with assisting in the developing of EIA's during the 90's.
A friend in Oregon who also was a pioneer in marketing EIA's had referred me to one of the two original companies which brought out the concept of EIA's I will be forever grateful to John Lenz. Both of these two companies used an actuarial firm located in Canada which brought the original concept into the USA. Of the two companies I chose to market the original High Water Method of crediting gains which Keyport was using. I believe I was the first pioneer when it came to creating a Continuation Education (CE) course for EIA's to be used for those who held an insurance license as well as CE for Certified Public Accounts (CPA's) and Enrolled Agents (EA's)'
With this new found knowledge and experience I approached an American Insurance Company, using their own actuaries to develop the first EIA solely using American actuaries for an American Insurance Company. Although this product was to be the third company offering EIA's as part of their fixed annuity portfolio it was to be the pioneer for American Companies using their own actuaries and having their own version of EIA's. This concept spread to many other insurance companies with many variations and has grown to what the insurance industry has now to offer–FIA’s.
Over a period of about 10 years I personally conducted over 1500 plus CE course instructions while traveling all six time zones. During this same time frame I was privileged to be given the opportunity to assist with or review in the developing process of several EIA products for various insurance companies, including the opportunity to work with the original Canadian Actuarial Firm who brought out the first two EIA products originally. EIA's/FIA's are fixed Annuities like any other fixed annuity except how the gains are credited in the contract. It is a concept that provides stock market linked returns with no market risk. EIA's/FIA's are not variable annuities nor are they a mutual fund. The insurance companies offering these fixed annuities are NOT TRYING to outguess, out think or outperform the market. Simply the gains are linked to some index; S&P 500, NASDAQ 100, Dow Jones Industrial, Russell 2000, Bonds, etc. Again, simply a fixed annuity that is linked to an index... Most importantly they are contracts not investments.
These annuities have a guarantee to them – Guaranteed Percentage of the Gain linked to a chosen index. If the market goes up the contract can make money and if the market goes down the contract will not lose money.
What are the basic mechanics and how do they conceptually work? The largest portion of a client's money is commonly invested in high grade bonds. These bonds earn enough interest to provide the end of term minimum guaranteed cash value, cover the companies' expenses, including compensating the insurance licensed agent and earn the company some profit. The remaining money, after the fixed obligations are met is used to purchase call options for the index chosen. The call options provide the growth potential within the contract. A simple explanation of a call option is a contract giving the buyers the right to purchase 100 shares of an underlying security at a specified price by a specified date. By purchasing a call option the companies acquire the right to buy stocks at a set price. The companies have to pay a premium to sellers for this option. If the market goes up the call options are exercised and if the market goes down the call options expire worthless. Again the insurance companies are NOT TRYING to: out guess, out think or outperform the market.
There are however moving parts to recognize along with the methods of crediting gains. They vary with product and with company. Today's FIA's have many riders to address income, death and they vary from company to company each having costs to participate. You may find interesting reading Wharton Financial Institutions Centers Personal Financial titled "Real World Index annuity Returns" of value.