Minimum guarantees
The minimum guarantee in a Fixed Indexed Annuity serve as a safety net for the investor.  A minimum guarantee is kept track of in a separate account for you the investor.  It is declared upfront before the contract is purchased and is guaranteed through the life of the contract.  The reason that contracts have such a provision is because  like all fixed annuities they have to pay some interest by law.  Since you have the option and choice to choose the index strategy that you want to receive interest from, your choices could theoretically lead to a 0% return, no gain.  In the event that, by your choosing you earn less than what the minimum guarantee would provide you get the higher of your account value or the minimum guarantee at the end of the contract term. 
Minimum guarantees come in all different forms and can sometimes be confusing.  Let me describe how they work:

Minimum guarantees at 100% or premium.  Some annuities will offer a minimum guarantee of 1.50% on 100% of premium.  What they are saying is that worst case scenario you will earn 1.50% per year on your money (less withdrawal and surrender charges).  If you are to surrender your policy early they will apply certain surrender charges to the minimum guarantee and account value and you will receive the higher of.  Since all Fixed Indexed Annuities have two separate accounts that they keep track of:  Minimum guarantee and the Accumulated value (made up of the index strategies you choose), at the end of the term you will receive the higher of the Minimum Guarantee or the Account Value.  If your accumulated value is not equal to or higher than the stated minimum guarantee you get to keep the minimum guarantee. 

Minimum guarantees that are less than 100%.  Some annuities offer a minimum guarantee for example 2.50% on 87.5% of premium.  This is not necessarily a bad thing, you just have to understand how it works.  Yes it’s true that the minimum guarantee is only on 87.5% of your premium.  Meaning that if you put in $100,000 into a 10 year contract your minimum guarantee would start earning it’s minimum guaranteed interest rate on $87,500.  Your contract value on the other hand is working to earn interest on the entire premium you put in.  At the end of the of the 10 year contract (in the above annuity example) your minimum guarantee amount would be worth $112,007.40 (That’s just above a 1.2% annual rate.) It is important to note that whenever you see a minimum guarantee less than 100% that the surrender charge has already been taken out.  For example if after the 6 year your minimum guarantee is worth $101,000 and your accumulated value is worth $105,000 with a 6% surrender charge (netting you $98,000) your minimum guarantee would be worth more since it started at 87.5% and already had the surrender charge taken out.

Some annuity products offer higher minimum guarantees than other annuity products.  This doesn’t mean that one product is better or worse, it just means that they are different.  Products with higher minimum guarantees offer lower potential interest payments through the index strategies and companies that offer lower minimum guarantees offer the greatest potential upside in the index strategy.  You really need to speak with one of our insurance professionals to decide which is right for you.  We can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or 888-515-7152.