- 1). Review your investment goals and tolerance of investment risk. The general rule is the closer you are to retiring or needing assets, the less risk you take. An article in "The New York Times" by Tara Siegel Bernard in 2009 states many advisers recommend eight to 15 years of conservative liquid assets for retired investors to reduce the chance of needing money in a down market.
- 2). Compare the minimum guarantee to other conservative investment interest rates. Look at bank savings and time certificates as well as Treasury Bonds to see if the minimum rate will sustain you the way other conservative investments will. Index annuities get the minimum guarantee when the stock market drops.
- 3). Calculate your upside potential. The equity annuity follows a market index; if the index goes up, your annuity receives a percentage of the growth. The participation rate may be anywhere from 50 to 100 percent meaning if the S&P 500 goes up 15 percent in one year, and your participation rate is 80 percent, your growth is 12 percent.
- 4). Check all caps on growth. Because the insurance company selling the annuity needs to ensure it remains solvent when paying minimums in down years, it caps the up year potential. You may have a 10 percent annual cap, meaning the year the S&P went up 15 percent, you could only get a 10 percent maximum return instead of the 12 percent participation rate.
- 5). Understand the liquidity features inside and out. Every annuity has a surrender period, the contract term you are required to keep the assets in, otherwise you incur penalties. Equity annuities may have surrender periods extending to 15 years with 10 percent liquidity per year. Check for any riders that allow you immediate access to your money penalty free. Riders include long-term care or disability.
- 6). Find the ratings on the insurance company offering all these guarantees. With no federal backing, you need to rely on the strengthen and solvency of the insurance company. Use research sites such as Moody's and AM Best to locate annuity companies with solvency ratings of A, AA or AAA.
- 7). Read the fine print. Many equity annuities only guarantee 90 percent of your principal investment. If you take money out early, you may not get all your money back.
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