How Fixed Indexed Annuities Work

Fixed Indexed Annuities are valuable tools for many who are planning their retirement. Along with a company pension and social security, a Fixed Indexed Annuity can provide the basis for guarantees in a retirement plan. Fixed indexed annuities are excellent investments that allow you to enjoy the benefits of interest linked to the market without being affected by market risks.

About Library of Financial Articles

Fixed Indexed Annuities provide guarantees.

Fixed Indexed Annuities are valuable tools for many planning retirements. Along with a company pension and social security, a Fixed Indexed Annuity can provide the basis for guarantees in a retirement plan. Fixed indexed annuities are excellent investments that allow you to enjoy the benefits of interest linked to the market without being affected by market risks.

Also referred to as equity annuities, they are investments that are insured, and they are linked to the interest rate. This means that the interest paid on these annuities will be affected by the stock market index. For example, if your fixed indexed annuity is linked to the Standard & Poor’s 500 (S&P), when that stock market index grows, so does your annuity. As long as the stock market index rises, your account will be credited by the insurance company with your portion of the gain, which is calculated on the policy anniversary date. If the market has a negative year, you will not lose any money from your principal, and you will not earn any interest payments.

This annuity fund is safe, and because there is little risk, it is also very popular. By combining the safety with the opportunity to earn extra interest when the market rises, fixed index annuities offer several good options for investors looking for security. There are other advantages to this type of fund, as well. In addition to taking advantage of multiple income streams, you have the choice of when you will make your investment, and you can also choose the guaranteed income option. The benefits of this type of investment are diverse but can be simplified to the following list:

    • Fixed annuity. You determine what markets (index) your policy is linked to. This gives you more control over where and how your money is invested.
    • State-regulated. Fixed indexed annuities are regulated and approved for sale by the individual States.
    • Principal protection. Your principal is guaranteed, and you are protected from losing any policy value due to market risk.
    • Probate advantage. Most fixed index annuities offer death benefits that do not have to go through probate before they are distributed. Your accumulated cash value will be given to the designated beneficiaries without going through court.
    • Death benefits. Your beneficiaries will collect the value of your investments, including the interest that has accumulated, if you pass away before collecting your income payments.
    • Cash access. Depending on your policy, you can generally access up to 10 percent of your principal per year; after the first, penalty-free. Withdrawals above the penalty-free cap will be subject to a surrender charge. Some policies offer a Return of Premium (ROP) rider. This feature allows you to take 100 percent of the original premium without penalty surrender. Some companies offer this rider for no cost.

The S&P 500 stock index is not the only market these annuities can be linked to, and you can either choose one or a combination of indexes. Another advantage is getting to choose when and how the interest is measured and credited to your account.  You can benefit from higher accumulations that are linked to a particular index. This investment option is especially well suited for people who are preparing for retirement or have already retired. This is an attractive option for investors who draw their primary income from pensions. The annuity owner never gets 100% of the index gain. Instead, they receive a portion of the gain as compensation for no exposure to market risk.

The primary benefit of this type of account is that you can increase your assets safely. These annuities are based on guarantees offered by the insurance company. Your primary source of income is interest payments; there are opportunities, though, to increase the interest as the market does better over the long term and by using an add-on feature, income riders. Your money is safe and will benefit you and your children or any beneficiaries you want the principal and interest paid to when you pass away. Putting your money to work, for you and your children, with no risk to the balance is a safe and effective way to supplement your retirement.

About Library of Financial Articles

View The Best Annuity Rates Available Now

Annuities are a safe and reliable investment. They can transform your savings into a more predictable income. Speak with one of our qualified financial professionals today to find out how an annuity can offer you guaranteed monthly income for life.

Our unique system of “Pooled and Shared” articles by our authors, our outside contributors, and writing assistants provides efficiency, enhanced collaboration, and greater topic accessibility. This allows for a better utilization of content and productivity while delivering meaningful content to our readers.

Content in our posted articles is deemed to be accurate but topics, facts and laws can change. It is always a good idea to verify facts before making decisions. Always seek authorized and professional advice regarding financial decisions which includes investing, annuity purchases, tax planning, changes in a financial portfolio and retirement planning.

Share This Entry:

In This Article

Protect Your Retirement

Our 20th edition of The Safe Money Guide, the standard of the industry.

Recent Posts

Archives