Fixed Index Annuity

What is a Fixed Index Annuity?

A fixed index annuity (also known as an equity annuity) is an insured investment that ties your interest rate to the growth a major stock market index, like the S&P 500. As the S&P 500 rises, the insurance company credits your account with interest, minus the cut it takes for itself. When the S&P 500 falls, the insurance company protects your principle against losses with a low but positive interest rate. This investment vehcile is becoming increasingly attractive as it offers the best features of fixed and variable annuities.

ยป Get Quotes for the Best Index Annuities

Comparing Index Annuity Risk

Effectively, the index annuity takes the risk out of stock market investment because the insurance company guarantees a minimum rate during bad market conditions. This rate is typically around 2%.

Compared to a fixed annuity, an index annuity offers the same guarantee: you will never come out with less than you came in. But, whereas a fixed annuity sets a constant rate of return, an index annuity allows investors to cash in on equity-based growth. With an index annuity, investors never know exactly how much their accounts will grow in the coming years, but they take solace in the fact that equities always out-perform debt-based instruments (like fixed annuities and CDs) in the long term.

Compared to their variable cousins, index annuities are recession-proof, making them the perfect retirement investment vehicle:

As most successful investors attest, the secret to building lasting wealth is managing loss. This principle is called capital preservation: earn more by loosing less and shield yourself from turbulent economic conditions. Historically, 1 out of every 4 years the S&P 500 goes into the red. If you can avoid losing capital during that one year, the other 3, over the long-term, will grow your wealth at an exponential rate. Index annuities do just that. Whereas you'd be losing money with a variable annuity during that inevitable negative year, a fixed index annuity will return a low — but still positive — rate. In most retirement plans this safety net is well-worth the cost.

Don't Just Shop, Implement a Solid Retirement Strategy

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.

Speak with an advisor over the phone about annuities for FREE.
(limited time offer)

Fixed Index Annuity Costs

The benefits of index annuities are clear, but is piece-of-mind worth the price? For that matter, what is the price?

A standard index annuity contract features several charges specific to this investment as well as those associated with annuities in general. For most investors considering index annuities as part of a retirement plan, these fees are outweighed by growth and the benefit of capital preservation.

Participation Rate: The insurance company could not afford to pay investors during negative years if it did not receive a portion of the earning during positive years. The percentage you pocket when the S&P 500 grows is known as the participation rate. Most contracts set this rate at 50%-90%. The rest goes to the insurer.

Cap Rate: Some insurers like to compensate for negative years by "capping" extraordinarily positive years. Anything earning above the cap gets skimmed into the insurer's coffers. A typical cap rate might be 20%.

Administrative Fee: Like mutual funds, many index annuities charge an annual administrative fee to cover overhead, paperwork, and brokerage fees. A typical administrative fee is 1.5%.

Vesting Schedule: Most index annuities limit or nullify earning when withdrawals are made beyond the annual penalty-free allowance, which is set in the contract. Typically, an investor can withdrawal 10% annually without penalty.

Without the above fees and charges, index annuities would be ideal investment vehicles. Unfortunately no such vehicle exists. In reality, many Index Annuity Alternatives share the same fees and impose even greater restrictions. Often these alternatives lack the advantages of tax-deferral, capital preservation, and equity-based growth.

Who Should Invest in Fixed Index Annuities?

Fixed index annuities are designed to play part in a larger picture: your retirement plan. All annuities are insurance instruments that protect against:

  1. Outliving one's income
  2. Excessive taxation
  3. Costs associated with death

An index annuity is appropriate for investors concerned with securing their dream retirement without micro-managing a portfolio or losing sleep over the day's market tumble. An index annuity complements a 401(k) or IRA and is a great alternative to low-yielding CDs, bonds, and treasuries. For more information on index annuities, see the complete Index Annuity Guide. To get actual rates on the best fixed index products from insurance companies across the country, contact a licensed annuity agent. Start the Free Comparison.

Related Articles