No. of Recommendations: 2
You misunderstand. The companies selling EIAs don't own the underlying stock. They buy derivatives (futures and options) that pay off to exactly match what the policyholder is promised. If they do it right, the insurer doesn't take equity market risk of any kind.

Just to expand a bit regarding the relation to the annuities I'm familiar with at least...

Let's say you invest $100 in the annuity. The insurance comany might take $95 to purchase a bond maturing in 12 months @ $100. There's your 0% floor.
That leaves $5 to take care of the upside.
The insurance company will actually sell a call, selling the upside above their ceiling. Let's say they can get $2 for this.
They then take the now $7 (100-95+2) to buy a call - ideally I suppose, one with a strike price as close to the current level as possible.
So the bond gives you the floor, and the options play give you your capped upside potential.

Other random thoughts:
I haven't seen anything with a 15% ceiling. More like 8% or 10%.

I'm certainly not a proponent of these products - but to say that the insurance company is stealing your money, seems rather absurd. The insurance company is providing a service - management of a portfolio that limits both downside risk and upside potential. They detail the fees and expenses that they charge for this service. They also detail the mechanics of the product. For many - myself included - these fees are not worth the service provided. Others however, may find value in the offering. Provided our original poster understands what he is purchasing - I'm certainly not going to judge how he spends his money, or effectively question his intelligence as this statement seems to do.

I would be interested to hear a recap Mike somewhere down the line, of whatever you decide to do. Your ultimate reasoning. Any questions you wish you had asked in 20/20 hindsight. Pleasure / displeasure with your decision.


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