What is an Indexed Annuity?
How Does an Indexed Annuity Work?
As with variable annuities, indexed annuity owners can invest in the stock market through an external index. As a result, they can earn a higher rate of return based on positive index performance. What sets indexed annuities apart from variable annuities is the added protection provided against market declines. Investing in a variable annuity comes with the risk of losing any additional interest if stocks and mutual funds perform poorly. With an indexed annuity, if the market declines you are still guaranteed to receive a minimum return.
Fixed vs. Fixed-Indexed Annuity
Just as indexed annuities share some characteristics of variable annuities, the same proves true for fixed annuities. A fixed annuity contract guarantees a set rate of return on every disbursement. The amount does not fluctuate and the payout terms are predetermined prior to disbursement.
Pros and Cons of Indexed Annuities
Indexed annuities are a low-risk alternative to variable annuities, and provide a guaranteed stream of income. Similar to other annuity types, this investment option allows for savings to accrue interest on a tax-deferred basis, and contracts can be tailored to an annuitant’s needs. However, it is important to weigh all benefits and risks prior to investing in this financial vehicle.
- Guaranteed income
- Potentially higher rate of return
- Full protection of principal from volatile stock market index
- Accrued interest
- Investment in outside markets
- Low cap rates
- Participation rates
- Withdrawal fees
- Inflexible contract terms
- Difficult to understand
- Anderson, B. (2017, September 26). Understand the pros and cons of fixed index annuities. Retrieved from https://annuitystraighttalk.com/11937/pros-cons-fixed-index-annuities/
- CNN Money. (n.d.). Ultimate Guide to Retirement. Retrieved from http://money.cnn.com/retirement/guide/annuities_equityindexed.moneymag/index.htm?iid=EL
- Grensteiner, R. (2012, August 21). Index and variable annuities: Exploring the similarities and differences. Retrieved from https://indexedannuitiesinsights.com/index-and-variable-annuities-exploring-the-similarities-and-differences/
- Investopedia. (n.d.). Indexed Annuity. Retrieved from http://www.investopedia.com/terms/i/indexedannuity.asp
- Powell, R. (2015, August 14). Retirement: Pros and cons of fixed-index annuities. Retrieved from https://www.usatoday.com/story/money/columnist/powell/2015/08/13/retirement-pros-and-cons-fixed-income-annuities/30626141/