What’s the Difference Between a Deferred Indexed Annuity and a Fixed Annuity?

You’ve probably heard of standard annuity products, such as immediate, deferred variable or fixed annuities. With a fixed deferred annuity, in return for a principal deposit, you are paid an attractive fixed interest rate. Fixed deferred annuities act much like a bank certificate of deposit; you give up access to your money for a fixed period of time and get paid a competitive interest rate in return. A fixed rate annuity product is safe and has a set interest rate. The flipside of fixed deferred annuities is that the interest rate may be too low for some looking to maximize the return on their savings. Enter the newest form of annuities – the indexed annuity.

Consumer demand for a product that featured the safety of a fixed deferred annuity but also had the opportunity for higher returns spawned the creation of the indexed annuity, also called fixed-indexed or equity-indexed annuity, in the early 1990s. The indexed annuity, by combining the higher possible returns of a variable annuity with the safety and stability of a fixed deferred annuity, captured the best of both annuity worlds.

Like all annuities, an indexed annuity is 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 the credited interest rate. The point to point indexing method is most commonly used - the interest credited is determined by comparing the difference between the index values from one date to another. The term usually consists of one year intervals and begins on the annuity’s issue date.

The facts of an indexed annuity are simple: your original premium and all of your credited interest earnings are guaranteed. In the event the market performs poorly for a prolonged period of time, you are guaranteed a minimum interest rate, typically around 1-3%. 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 10% interest. Even with an earnings cap, you are likely to receive higher returns than a CD, savings or money market account.

Interested in learning more about an indexed annuity? Call the Annuity Specialists at AnnuityAdviceOnline.com at 1-888-837-4226. They are able to answer any questions you may have and prepare a free personalized recommendation for you.