Equity Indexed Annuities (EIA)
An investment vehicle offered by an insurance company which is categorized as a type of Fixed Annuity. An insurance company invests a majority of the annuity funds in the same investment as a Fixed Annuity. The remaining balance is used to purchase call options on a particular equity index (e.g., the S & P 500). If the stock market goes down it does not affect the value of the policy because the actual index is not owned by the policyholder. If the market goes up the call options become more valuable and a higher interest rate (partially based on the index performance) can be paid to the policyholders. An EIA does not participate in dividends from the companies in the equity index. Dividends have made up a significant portion of the returns associated with some indicies, such as the S&P 500. EIAs are very complicated investments which provide for no investment losses and the potential for partial index investment gains. Most policies have Surrender Charges to withdraw funds (see the Surrender Charges definition). The sale of EIAs as promising stock market returns with no risk has been criticized by regulatory agencies as misleading.