How Indexed Annuities Work

Indexed annuities are relatively new to the financial world, having only been around since the mid-1990s. In fact, they are one of the newest annuity products on the market, period. The development of indexed annuities signified a shift in the way Americans were saving – from longer term risk based investments to shorter term principal protected options. Insurance companies, naturally wanting to take advantage of this shift, developed indexed annuities, often referred to as fixed indexed annuities or equity indexed annuities. Indexed annuities are a way that people who are interested in participating in the growth potential offered by the stock market can do so, with no market risk.

Like fixed annuities, indexed annuities protect your original premium deposit and any credited interest earnings and are tax-deferred until you withdraw your funds. Unlike fixed annuities, indexed annuities do not pay a steady and predictable interest rate. The interest you earn is instead tied to a particular stock market index, such as the S&P 500. When the market goes up, a predetermined formula is applied to calculate what percentage of that gain will be credited to your annuity in the form of interest earnings. Indexed annuities have caps, which is the highest interest amount you can earn in any given year. Insurance companies impose caps to keep indexed annuities safe – so they can continue guaranteeing principal and interest earnings. When the market goes down, you are guaranteed a minimum interest rate, which protects you against loss.

However, figuring out the amount credited to your account annually is not as simple as just studying the market. There are numerous methods applied to calculate interest earnings in an indexed annuity, the most common being the point-to-point method. Basically, the market index is compared on two dates – typically, your original purchase date and on that date every year after. The percentage change between where the market stands on these two dates is what you earn as credited interest. Of course, indexed annuities have surrender terms and other unfamiliar conditions, so you’ll want to speak with a knowledgeable Annuity Specialist before buying an indexed annuity.

Indexed annuities aren’t for the most conservative of savers, and they aren’t for those who are reaching for the highest gains, either. Indexed annuities offer a middle ground for wary, but optimistic individuals saving aggressively for retirement. Does this sound like you? If so, contact FixedAnnuityDirect.com at 1-877-519-8599 to learn more about the pros and cons of indexed annuities.