A further examination of equity indexed annuities

Abstract

Equity indexed annuities (EIAs) are deferred annuities that credit interest according to a formula tied to the performance of an underlying equity index. This research expands previous research, particularly that of Reichenstein (2009, 2011), by examining the distribution of returns that could have been created on a rolling monthly basis since 1928 for 11 through 15-year investment horizons.Second, we examine investment alternatives that include the options imbedded in EIAs. Third, rather than assuming constant cap rates we allow cap rates to vary with interest rates. We find that for long time horizons the opportunity costs of investing in EIAs is high.