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Indexed Annuities

 

An indexed annuity is essentially a hybrid of a fixed annuity and a variable annuity. Indexed annuities are also commonly referred to as equity-indexed annuities.

Indexed annuities offer many of the conservative guarantees of traditional fixed annuities, coupled with the potential to earn higher returns based on the performance of a stock market index (for example, the S&P 500 Composite or the Dow Jones Industrial Average).

Unlike investing directly in the stock market, an indexed annuity typically has guarantees preventing you from losing money in any given year if the market index linked to your annuity drops. The insurance company also guarantees a minimum return in case the market index falls or does not rise by much during the life of the annuity contract. These guarantees reduce the potential downward volatility inherent in investing in the stock market.

Like other types of annuities, indexed annuities also have the benefit of tax-deferred investment growth.

Accumulation and Payout

During the accumulation phase you make account contributions to the insurance company and those contributions are invested. When the payout phase is reached you can begin making withdrawals from your variable annuity without incurring surrender charges. You can choose to receive your payout as a single lump sum, or spread it over a period of time via regular payments (normally monthly).

Interest Rate Calculation Based on a Market Index

The insurance company uses a mix of stock options and bonds to achieve a targeted participation rate in the specific market index. The participation rate is expressed as a percentage, for example, 90%. This means that the annuity holder will be credited with 90% of the gain in the market index. If the index gained 10% during the year, the annuity would earn 9% (90% participation rate x 10% index gain = 9%).

Indexed annuities may also use interest rate caps. An interest rate cap is a limit on the maximum rate of interest the annuity can earn in any given year. For example, if an annuity had an interest rate cap of 8% and the index gained 9%, only 8% would be credited to the annuity.

There are several different methods of calculating the change in index value. These include:

  • Annual Reset (or Ratchet) Method

    Interest is credited to your account based on any increase in the value of the index from the beginning of the year to the end of the year.

  • Point-to-Point Method

    Interest is credited to your account based on any increase in the value of the index from the beginning of the contract to the end of the contract term.

  • High Water Mark Method

    Interest is credited to your account based on any increase in the value of the index from the beginning of the contract to the highest index value at various points during the contract's term, for example, each annual anniversary of your contract purchase date.

It should also be noted that the returns generated by most indexed annuities are based on changes in the market index derived from price movements only, and exclude dividend income from the underlying stocks.

Indexed Annuity Fees and Charges

The guarantees provided by an indexed annuity do not come without cost. The insurance company must charge a fee as compensation for these benefits. This fee is often referred to as a margin, spread, or administrative fee. The fee is normally expressed as a percentage and is deducted from any gain in the market index. For example, if the margin was 2% and the index gained 10%, only 8% would be credited to the annuity (10% index gain - 2% margin = 8%).

If you surrender you contract before you reach the payout phase, you will likely be required to pay a surrender fee (early withdrawal fee).

Indexed Annuity Quotes

Requesting indexed annuity quotes is easy. Simply complete the easy request form, starting with your zip code below. There is a variety of investment options in most states, designed to cater for differing investment goals and risk strategies. Should you require any further information you can always to discuss your particular situation with a qualified insurance agent in your state when you request your indexed annuity quotes.

Please note that all annuity quotes are free and you are under no obligation to purchase an annuity as a result of requesting a quote. Our goal is to assist you in making informed investment decisions based on your personal needs and circumstances.

 

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