What Is a Fixed Indexed Annuity

Fixed Indexed Annuity:

Fixed Indexed annuities are issued by life insurance companies and are a unique type of fixed annuity.  They are Fixed Annuities not investments in the stock market.  They offer many benefits as traditional fixed annuities such as guaranteed interest rates,  flexile liquidity, and tax deferral. 

An Fixed Indexed Annuity can be best described as a fixed annuity that links your interest payments to an outside stock market index.  Essentially fixed indexed annuities combine the features of a fixed annuity, with an interest crediting option that provides the holder with a very competitive interest rate that rises when the market rises. 

The interest crediting methods are called the Indexed Strategies.  There are several indexed strategies that companies use.  You can read about these index strategies in great detail by clicking here.  In a nutshell what these annuities offer is a choice.  They allow the investor the choice on how to receive interest.  The choice for the investor is to either select a declared rate (known upfront) of interest to be paid for that year, or to they can select an index strategy which could be potentially higher if the market index increases.  If they do select the index strategy there is no risk of losing money if the index goes down, but there is a chance to earn little to no interest that year.  Each year the investor gets to make this decision on how they receive interest.

Index annuities offer the potential to earn more interest than traditional fixed, deferred annuities when there are gains in the financial index (not to exceed any declared index caps, participation rates or fees), while limiting the market risks inherent to variable annuities.  Whereas variable annuities can actually lose value in "down" markets, the effect on indexed annuities is limited by a "zero" minimum credited rate. Click here to see an example. 

Benefits of a Fixed Indexed Annuity:

• Guaranteed Principal:  Indexed annuities guarantee your safety and guarantee your principal regardless of market fluctuations.  Your annuity premium and account value does not fluctuate with the value of the stock market index to which the interest rate is linked.  Early withdrawals that exceed the free amount are subject to surrender penalties and may result in loss of principal

• Tax Advantages: During the accumulation phase, interest accrued inside annuities is not subject to federal or state income taxes until funds are withdrawn.  (A ten percent federal penalty may apply to distributions before age 59 1/2.)  This provision allows you to benefit from tax-deferred interest compounding.  During the payout phase, taxes are spread out over the entire expected duration of the stream of payments.

• Liquidity:  Most Fixed Indexed Annuities are contracts for a specific length of time generally 5-10 years.  During that time frame if you need to cancel the policy there are certain penalties and charges that you would owe.  Luckily most of these fixed indexed annuities offer what are called "Free Withdrawals" which allow you to take money out of the contract before the term is up and not be charged any penalties.  Some companies will only offer interest free withdrawals while others offer a full 10% of the contract value each year without penalty.  It is something that you need to pay attention to when buying a fixed indexed annuity.  We at Annuity Rate Shopper prefer contracts with at least 10% free withdrawals per year no matter what kind of annuity it its.

• Income for Life:  Annuities are the only products in the market that can guarantee a stream of payments you can't outlive.

• Growth Potential:  Even though the design of an index annuity limits its growth and normally will not equal the growth of the overall equity market, it offers the potential for a higher return than other types of fixed annuities of fixed accounts that provide downside protection.
    See our top Index Annuity Rates.
   

See Our Top Equity Indexed Annuity Rates!

See Our Top Equity Indexed Annuity Rates!