Fixed Indexed Annuities - Growth Potential Based on a Market Index
A fixed index annuity gives you more risk – but more potential return than a fixed annuity – but less risk and less potential return than a variable annuity. It is also known as an equity indexed annuity.
As its name implies, its value is linked to a market index, such as the S&P 500 Composite Stock Price Index*, a collection of 500 stocks intended to represent a broad segment of the market.
Designed for retirement saving
Like other types of annuities – fixed or variable, immediate or deferred – indexed annuities are long-term vehicles designed to help you save for retirement.
Keep in mind that if you take your money out early, you may have to pay surrender charges and, if you’re younger than 59½, an additional 10% tax penalty. Naturally, if you take an early withdrawal, your death benefit and the cash value of the annuity contract will be reduced.
Fixed index annuity features
Indexed annuities don’t directly participate in stock or equity investments
Withdrawals or surrenders before the expiration of an indexed period will result in no index participation for those amounts
Failure to maintain the contract until it matures may result in no participation in the equity index
Actual returns may be less than the return of the linked index − possibly even negative if you surrender any of the contract before the expiration of any applicable surrender charge period
While sales of indexed annuities have grown in recent years, some of their features can be difficult to understand, such as the various methods for calculating the interest.
Some common methods include:
Annual reset/ratchet, based on the annual change in value of the index
Point-to-point, based on the change in the index’s value from the beginning to the end of the annuity’s contract term
High water mark, based on the increase in index value from the beginning of the contract’s term to the highest index value at various points during the contract’s term – typically contract anniversaries
Other factors can influence indexed annuity values
Indexed annuity values are influenced by:
Participation rates – The participation rate is how much of the index increase you actually receive. For instance, if your participation rate is 75% and the index increases 8%, you’ll earn 6% for the period because 75% x 8% = 6%.
Interest rate caps – Some indexed annuities have a maximum rate - or cap. If the market goes up less than the cap, your account value will be credited with 100% of the annual performance of the index, not including dividends or distributed capital gains. If the market goes up more than the cap, your account value will be credited with the amount of the cap. If the market goes down, your account value remains the same, less any withdrawals you may have taken.
Fees and charges – The fee you pay, also known as the margin or spread, is generally deducted from the interest you earn. For instance, if you pay a 2% fee and the index earns 9%, you would actually be credited 7% because 9% - 2% = 7%.