A Buyer’s Guide to Indexed Annuity Features

An Indexed Annuity, while not the most simple of financial products to understand, has some common contract features that are shared across most policies. Understanding these common features better prepares you as a buyer of an indexed annuity.

The two features that have the greatest impact on an indexed annuity’s future value are the indexing method and the cap rate. Indexing methods vary among indexed annuities, but there is always some type of indexing method determining the way in which the annuity credits interest. For instance, the interest earnings of the indexed annuity are determined by the movement of a particular stock index, like the S&P 500. Snapshots of this particular index are compared to determine the annual interest return. Some common indexing methods and terms include annual reset (ratcheting), high-water mark and point-to-point. An annual reset indexing method resets the starting point at the end of each annual indexing term, locking in the previous year’s interest earnings and providing a new starting point for the coming contract year. With a high-water mark method, interest is decided by comparing the index values at various points during the contract term, usually the annual anniversaries of the date you purchased the annuity. The interest earnings are then based on the difference between the highest index value and the index value at the start of your contract. Lastly, the point-to-point indexing method relies on the difference between the index value at the start of the term and the index value at the end of the indexing term. Typically, this point-to-point comparison is made on an annual basis.

The cap rate is the upper limit of what an indexed annuity can earn. Indexed annuities impose cap rates to protect their customer’s deposits in the indexed annuity. If the market index that the indexed annuity is tied to returns 12% and the annuity’s cap rate is 8%, the interest paid on that annuity will be 8%. However, indexed annuities also offer minimum interest guarantees – so if the market index tanks, you are still paid the minimum amount.

Still confused about the intricacies of an indexed annuity? Call the Annuity Specialists at FixedAnnuityDirect.com today at 1-877-519-8599 to learn more about indexed annuities.