These investment vehicles are called “indexed” because they earn their returns based on an accepted major market index, like the S&P 500 or the Dow. There are advantages and disadvantages to having an annuity contract tied to a key market index. Contract owners can receive lower or higher returns based solely on market performance. Most indexed annuities do have built-in minimum and maximum levels that protect investors in bad times and restrict extremely high payouts in good times.
Many people planning for retirement or looking to provide a guaranteed stream of income for themselves turn to annuities. But there’s a lot to know about these rather complex insurance products. Before putting retirement money or savings into an annuity, take time to know the key facts about one of the two main types of these structured insurance products: Indexed Annuities.
What is an Indexed Annuity?
An indexed annuity is a much more complex instrument than a fixed one. Subject to many variations about how payouts are administered and how, and whether, the principal is returned to an annuitant, the basic feature of an indexed annuity is a variable rate of return.
By tying the return to the general performance of the stock market, the annuitant receives higher returns on the investment when the market is doing well and lower returns when the market if off. Most contracts specify a capped interest rate, which means you won’t get stellar returns even when the market rises by a significant amount. Alternately, you are protected against a declining stock market with minimum rate guarantees.
Many insurance companies allow for multiple deposits, over time, into the account. This is in contrast to many types of annuities that are set up to receive just a single deposit of a lump sum.
One other feature that gets attention from investors is the “right to review.” It’s actually a free-trial type of setup that gives you between 10 and 30 days to decide whether you want to stay in the account or get your initial deposit back.
Key Things to Remember
The chief advantages of indexed products include deferred tax liability, guaranteed rates of return and competitive interest rates compared to similar bank products.
It’s always important to thoroughly research the company issuing the contract and the structure of the contract before committing any amount of funds to an annuity account.