Index annuities were created in 1996, when investors were shifting their attention from bond-based investments like fixed annuities to stock-based investments, including mutual funds and variable annuities. (The greatest stock market rally in the history of the universe was well underway by then.)
To capitalize on the excitement over stocks, some insurance carriers started marketing a new kind of fixed annuity, called an equity-indexed annuity, or EIA. Like other fixed annuities, the EIA offered protection against loss of your initial investment, a payout to your beneficiaries if you died, the ability to defer taxes on interest earned, and the option to convert your money to retirement income.
But a couple of new twists were added. If stock prices rose during a specific time period, EIA owners received an interest rate based on the rise in stocks. If stocks fell, EIA owners earned a minimum interest rate. EIAs were sold as the perfect investment for anyone who wanted the benefit of stock market gains without the risk of investing in the stock market.
Sales of EIAs languished during the late 1990s. Between 2001 and 2003, many investors avoided bonds because they paid too little interest. (Low rates were great for mortgage buyers, but not for investors!)
At the same time, investors were still in shock from the stock market crash of 2000, and avoided stocks. Insurers promoted EIAs as the perfect solution: an investment that grew when the stock market went up but stayed the same (more or less) if the stock market went down. Sales of EIAs jumped from $5.5 billion in 2000 to $25 billion in 2006.
Since 2006, EIAs have undergone several changes, including a name change. Insurers began calling these products FIAs (fixed-indexed annuities) instead of EIAs, in order to avoid suggestions (and avert any accusations) that EIA contract owners were investing their money in stocks (also known as equities). Many investment professionals simply called them “index annuities.”