What Are Fixed Indexed Annuities?

There are many different types of annuities and these include fixed annuities and variable annuities. While fixed annuities offer investors a fixed rate of return for a pre-determined period of time, variable annuities are unstable as they depend on the performance of the stock market. Fixed annuities are basically for investors who wish to take low risks with their investment and want to be assured of the rate of interest that they will receive and the period for which the investment is made. Variable annuities are fairly high risk and may at times give astronomical returns and sometimes could also lead to huge losses.

There are various types of fixed annuities and fixed indexed annuities are one of them. They are a kind of mid path between the fixed and variable annuities. Fixed indexed annuities have certain features of fixed annuities such as a guaranteed minimum interest rate and also benefit from the superior performance of specific stock index.

Chief Features of Fixed Indexed Annuities

Fixed indexed annuities offer investors a chance to gain from the superior performance of the stock market whilst being promised a minimum rate of interest on their investment. Thus it is less risky than variable annuities and has the potential to give higher returns than fixed annuities.
The returns on a fixed indexed annuity are related to the performance of a certain group of stocks of a specific section of the market.
Index-linked interest rate of fixed indexed annuities is mainly dependent on three factors: participation rate or the amount that the annuity will benefit due to a gain in the index, asset fee or the percentage that will be reduced from indexed-linked interest, and interest rate caps or the maximum limit to the amount an annuity can gain from the stock index’s superior performance.
There are different methods by which the index-linked interest is calculated and these include the annual reset wherein the change in gains is studied over the year and locked in, the high water mark considers the index value usually on the annual anniversaries, and the point to point method which compares the performance of the index at two points in the year.

Fixed indexed annuities guaranteed minimum return usually promises the investor 90% of the invested amount and about 3% annual interest rate. It is important for investors to understand that fixed indexed annuities should be considered as long-term investments as only then can they truly benefit from their investment. If the money is withdrawn early they may not benefit from the indexed-linked interest and in fact may have to bear losses due to surrender charges. Also if the investor were less than 59 ½ years of age then they would be charged 10% tax penalty above the tax levied on any gains from the investment.

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