Equity Indexed Annuity
Get a Quote »A equity-indexed annuity has attributes of both a fixed and a variable annuity account. Much like a variable annuity, interest gains will vary depending on the performance of the chosen index, but like a fixed annuity the principal and credited interest (gains) cannot be lost due to market fluctuations.
The big difference between variable and indexed annuities is that variable accounts rely on appreciation of volatile market assets like stocks and bonds. The owner has to buy low and sell high. Conversely, indexed annuities rely on interest gains tied to market performing indexes like the S&P 500®. The account does the buying and selling automatically and the interest gains can never be less than zero.
Indexed annuities are insured, cannot lose value, and have no direct stock or bond market exposure. Thus, these investment accounts are significantly different from variable annuities. This is advantageous for conservative minded investors who desire safety and the potential for higher returns.
Indexed Annuities Offer Higher Interest Potential
The stock market has been very unpredictable and extremely volatile over the last decade. Investors have lost untold billions and many are looking for safe and insured investment options. Fixed indexed accounts are a popular alternative to the overall markets as they avoid losses during market corrections while crediting interest during market upswings.
Equity indexed (also referred to as fixed indexed) annuities are unique in the manner in which they credit interest. Traditional fixed annuities credit interest daily based on the internal returns of the insurance company’s portfolio – much like a certificate of deposit.
Indexed accounts do not credit interest daily. Rather, the insurance company uses the same interest returns normally credited to a traditional fixed account to purchase option contracts.
The option contracts are tied to the S&P 500®, Dow Jones®, NASDAQ® or one of several other market indexes chosen by the account owner. The option contracts either increase in value (and credit interest to the account) or expire worthless. You are only risking your interest each year.
How Do Fixed Indexed Annuities Credit Interest?
If the chosen index (S&P 500 for example) increases over a predetermined period of time (usually one year) then the value of the option contract will increase as well.
Assuming the S&P 500 index has increased in value, the insurance company would then credit interest to the annuity at the end of the year. The credited interest now becomes principal and the process would begin anew for another twelve month cycle.
In contrast, if the option has lost value over the one year period, then no interest would be credited to the annuity account and the option would expire without value.
To simplify this point: Only the potential interest for the current year is at risk, but the principal and interest gains from prior years are not. The account either increases or maintains value, but any interest gains from previous years are locked in and cannot be lost in subsequent years. In this way, you are only leveraging your yearly interest in hopes of better returns. In no way are you risking your principal or past interest credits.
Annuities Have A Minimum Guaranteed Value
It is also important to note that all indexed annuities offer minimum guarantees to the account owner. Should the index credit no interest for the entire term of the annuity due to extremely weak market conditions, then the principal will be multiplied by a predetermined percent as stated by the insurance company in the contract.
It is very rare for the guaranteed minimum value to be worth more than the accumulated value however. In almost all cases, the index performance will surpass the declared minimum guarantee. If you are more conservative in nature, then a traditional fixed annuity might be best for you, but if you are willing to leverage your usual interest for the opportunity to capture and keep higher returns, then an indexed annuity may be a more suitable investment.
Advantages Of An Indexed Annuity – Investment Options
Indexed accounts were designed to credit higher returns than traditional fixed annuity accounts. In many years, indexed accounts have performed very well. It is not uncommon for accounts credit 7%-10% interest returns when market conditions are favorable. And there are rare years where interest credits have exceeded 20%.
Of course, there are bear market years when there are little to no gains credited to the annuity. No matter the economy, returns will never be less than 0% however. That is the downside protection of indexed annuities.
Almost all equity indexed annuity contracts also have a fixed account as an investment option as well. The traditional fixed account can be used in years where you fell like the chosen stock indexes will be flat. Rather than wait out negative market cycles offering no returns, the owner can achieve modest gains in the fixed sub-account.
You will have the ability to switch funds between the fixed account and several indexed accounts every year depending on the economic outlook. However, you must be in the indexed account at the beginning of the yearly cycle to participate in those gains.
Are Indexed Annuity Accounts Safe And Insured?
All fixed and indexed accounts are backed by the full faith of the insurance company offering them. Additionally, individual states require all insurance companies to be part of their state Life and Health Guaranty Association.
State insurance regulators created this pool so the Guaranty Association Act can step in should an insurance company fail to meet the obligations of their contract holders. Indexed annuity owners are insured up to $250,000 per contract and a maximum of $300,000 per household by most state Guaranty Associations.
The State Insurance Departments also regularly check each insurance company for solvency before allowing them to offer products such as annuities. In this way, there are two levels of protection; the insurance company itself and the State Department of Insurance for each state. All insurance companies have strict reserve requirements to provide a safety net for unexpected claims.
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In summary, indexed accounts are more aggressive than the traditional fixed annuities they evolved from. They are appropriate for consumers who might not be comfortable with direct exposure to the overall markets, but desire the possibility of above average interest gains without the risk of market losses.
Our independent annuity brokerage offers fixed-indexed annuity accounts direct to consumer from several highly rated and well capitalized insurance companies. We will help you find the most suitable account to fit your investment needs.