How to Find Top Indexed Annuities

Annuities come in different flavors and, depending on which you choose, they may or not be suitable for you if they don't meet your preferences for risk or your financial requirements. Stealing an analogy from a children's story, one annuity may be too hot (risky), while another one may be too cold (low returns) for your tastes. When indexed annuities were introduced in the 1990's, they sought to attract the investor who was looking for something that was "just right".

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Indexed Annuity Overview

Often thought of as a hybrid between a variable and fixed annuity, an indexed annuity participates in the growth of the stock market while capping the downside with a minimum rate guarantee. It is not considered to be an equity investment because the funds are not invested directly into the stock market.

Rather, like a fixed annuity, the funds are a part of the life insurer's general account, however, the yield, or rate of return, is based on the performance of a stock index, or a combination of different indices. The yield that is credited to your annuity account is derived from the percentage gain of the index.

For instance, if the index increases by 18%, year-to-year, the rate credited by the life insurer would be 18% less the participation rate. The participation rate is the percentage in which you participate in the gain. A 70% participation rate would mean that 30% of the gain would be deducted by the insurer. The insurer retains a portion of the gain as an offset to the cost of providing you with downside protection. 

There is a cap on the upside earnings, however, there is also a cap on the downside which is the minimum interest rate that is credited in any given year. This means that you can participate in the upside growth of the index while you won’t lose any ground during market declines.

The account values of an Indexed annuity are adjusted annually to reflect the year-to-year performance of the index.  Depending on the method used to do this, your account values could fluctuate from year to year. One method of account valuation, called Annual Reset, actually maintains the previous year’s account value as the basis should there be a decline in the index. If there is a gain, the account value is reset upwards and that becomes the new basis.

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Purchasing an annuity is a big decision. Online research is a good start, but prudent investors should discuss all their options and risks with an independent financial advisor. Request a free, no-obligation consultation today, along with a report of current rates on brand-name annuities.

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Finding the Top Indexed Annuities

The key components of indexed annuities are the index used for rate determination, the participation rate, the minimum guaranteed rate, the rate cap, the market value adjustment methods and the vesting schedule. Each of these features can be compared, side by side, by accessing an annuity comparison site online.  These sites enable you to sort annuities by the features that are most important to you.

Investment Index (Indices) Used

A standard index used in indexed annuities is the S&P 500. It’s a broad index of high quality stocks. Some companies offer a range of different stock indices allowing you to select one that fits your investment preferences. Others use a combination of several indices and apply a weight average.  It is best to look for an indexed annuity that uses an index in line with your investment preferences.

Participation Rate

This is a key factor in that it determines how much of the gain, up to the cap, you will participate in.  Obviously, the higher the rate the better. Look carefully at the provisions specify whether the rate is temporary or permanent.  You may be enticed by a high participation rate only to find that it drops much lower at some point in the future.  It may be in your interest to select a moderate participation rate if is guaranteed for the length of the contract.

Minimum Interest Guarantee

Indexed annuities eliminate your downside risk by providing a rate floor. Typical minimum rates are somewhere in the range of 1% to 3%. Obviously, the annuity with the higher floor is better, but don’t select it if the participation rate provisions are unfavorable. 

Rate Cap

Rate caps can range between 4% and 15% depending on the index and the participation rate.  Again, the rate cap may not be as important as the participation rate. 80% participation in a 6% cap is better than 40% participation in a 10% cap. So it’s important to do the math.

Account Reset

Each year the account values are adjusted for gains that are made. There are several methods used and the one that is recommended the most is the annual reset.  The annual reset method ensures that a previous year’s gain cannot be erased and that your base value will always use the most recent year’s gains as a new basis. 

There are any number and combination of riders and options that you will find as you search for the top indexed annuity. The key is to stick with these key measures and be mindful that it is difficult to find an indexed annuity that rates a 10 in each of these.  The best indexed annuity is the one that is competitive in all aspects.

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