What’s the Difference Between Indexed Annuities and Other Types of Annuities?

You’re probably familiar with annuity products, like immediate, variable or fixed deferred annuities. With a fixed rate deferred annuity, in return for a premium deposit, you are paid an attractive fixed interest rate, guaranteed for a predetermined period of time. CD-type or multi-year guarantee annuities act much like a bank certificate of deposit (CD); you commit your funds for a fixed period of time and get paid a competitive interest rate. A fixed rate annuity product is safe and backed by the issuing insurance company. The downside of fixed rate deferred annuities is that the interest rate may be too low for some looking to maximize their savings. Enter the newest type of annuities – indexed annuities.

Consumers were seeking a product that featured the safety of a fixed rate annuity but also had the opportunity for higher returns. In the 1990s, insurance companies introduced indexed annuities, also called fixed-indexed or equity-indexed annuities. Indexed annuities, by combining the higher possible returns of a variable annuity with the stability and safety of a fixed rate deferred annuity, capture the best of both annuity worlds.

Like all annuities, indexed annuities are purchased with a premium or principal deposit. The issuer of the indexed annuity ties your interest earnings to a particular stock market index, such as the S&P 500. Your money is not directly invested in the market; rather, an indexing method is used to calculate interest. The point-to-point indexing method is most commonly used - the interest is credited by comparing the difference between the index values from one date to another. The crediting term usually consists of one year and begins on the annuity’s issue date.

Indexed annuities are simple: your original premium and all of your credited interest earnings are guaranteed. In case the market tanks, you are guaranteed a minimum interest rate, usually around 2-3%. Indexed annuities usually have a cap, which sets the upper limit of how much you can earn. For instance, if the indexing method shows a gain of 12% and the cap on your indexed annuity is 10%, you will only receive credited interest earnings of 10%. Even with an earnings cap, you are likely to receive higher average returns than CDs, savings or money market accounts.

Interested in learning more about indexed annuities? Call the Annuity Specialists at AnnuityAdviceOnline.com at 1-888-837-4226. They will prepare a free personalized recommendation for you.