If you're a conservative saver who's unhappy with the rate on your bank CDs, the insurance industry has a hot new product designed exactly for people like you.

It's called an equity indexed annuity. It combines the safety of a traditional fixed annuity with a stock market kicker.

But the indexed annuities on sale today can be complicated, says annuity expert Timothy Pfeifer of the consulting firm Milliman & Robertson in Chicago. It's easy to think you understand them when in fact you don't.

A traditional fixed annuity pays a guaranteed tax-deferred rate of interest for anywhere from one to 10 years. When the guarantee expires, the rate will change.

Typically, you get a new rate every year. The current one-year fixed-annuity rate is around 6 to 6.5 percent.

If you don't like that rate, you could choose a variable annuity, which lets you invest in stocks or bonds. But if they decline in price, so will the value of your principal. Over the long term, stocks should earn more than 6.5 percent, but conservative savers hate to see losses, anytime, ever.

That's where the indexed annuity comes in. It promises that you'll always get a guaranteed minimum return. But instead of paying fixed interest rates, it links your investment to market performance often to price changes in Standard & Poor's 500 stock index, excluding dividends.

Every indexed annuity on the market has its own special wrinkle, making them all but impossible to compare. But here are the things to ask about:

(1) What is the annuity's term? Generally, you commit to holding for five to 10 years. The shorter the term, the greater the risk that the stock market won't perform well over your holding period.

(2) What do you earn when the market goes up? You're credited with anywhere from 60 to 100 percent of the price gain (excluding dividends). Some annuities can change that percentage from year to year, so you're never sure how much you'll get. "You lose a lot when your credited gains don't include dividends," says fee-only life insurance adviser Peter Katt of Mattawan, Mich.

(3) At the end of the term, how does the insurer figure your gain? Some use the market price on the day the annuity matures. Some look at each policy anniversary date and pick the highest one. Some credit a portion of each year's market gains, if any. Some average the gains. Some give you 100 percent of the gain but deduct 1 percent for expenses. There's no way of knowing in advance which type of annuity will pay the most.


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