What is an Indexed Annuity?
What is an Indexed Annuity?
Imagine if you could merge a tax-deferred savings plan, with guaranteed returns, and a stock market-linked index that provides genuine growth potential. Wouldn’t this create the perfect setting for you to confront the Seven Challenges with confidence?
That’s precisely what an Indexed Annuity offers. It is structured to provide a guaranteed minimum interest rate alongside market growth potential linked to an external index. Let us explain how it all actually works.
First, what is an Index? An index is a commonly accepted benchmark. For example the Consumer Price Index (CPI) is what economists use to indicate the inflation rate in an economy. The CPI is an average of the prices of a fixed basket of goods and services. The $100 you just spent at the grocery store bought around 5% less than it did a year ago. Why did this happen? The Consumer Price Index (CPI) helps explain the reasons behind this. Prices of certain items in the basket of goods may go up or down at different speeds. For example, gasoline prices might be increasing faster than tomato prices. However, the CPI index gives you an overall understanding of how inflation is behaving.
As there are indexes that track the prices of goods, there are also indexes that track the prices of stocks in the stock market. The stock market has several indexes, including the Dow Jones 30 Industrials, Standard & Poor’s (S&P) 500, and the NASDAQ Composite. Each of these indexes measures a different part of the stock market.
The value of the index is determined by the value of the stocks contained in that particular index.
Indexed Annuities are unique because the interest you earn is connected to the growth of a stock market index. These Annuities use an impartial method to calculate returns and provide maximum safety with guaranteed rates of return. With Indexed Annuities, you can earn interest tied to the stock market when it goes up. And if the market goes down, you’re guaranteed to never lose any money due to three specific protective features.
- Your principal amount is backed by the assets of the insurance company that issues your Annuity.
- You are guaranteed by contract to earn a minimum amount of interest each year. Regardless of any situation or eventuality.
- Any positive growth that is credited to your account is securely locked in, usually on an annual basis. You can rest knowing that you are contractually assured to never lose any of those gains due to future market declines.
Second, what is an Annuity? Basically, an Annuity is an agreement between you and an insurance company. You can either make a single payment or pay in installments over time to the company. In return, the insurance company will make payments to you according to your preferences for the rest of your life or over a specific time frame.
There are two types of Annuities: fixed and variable. Fixed Annuities offer a guaranteed minimum rate of return that remains constant regardless of how the market is performing. This means the insurance company takes on the risk. On the other hand, Variable Annuities provide a rate of return that can change based on the performance of stocks, bonds, or the money market. Similar to a Mutual Fund, you assume the risk with Variable Annuities.
Indexed Annuities can be seen as a combination of these types of Annuities. Indexed Annuities offer safety, potential growth, and flexibility. As mentioned earlier, a special formula is used to calculate annual interest based on the performance of a stock, bond, or commodity index. While the index is used as a benchmark, you don’t actually invest in it. This provides balance and protects you from market fluctuations. Your earnings typically won’t exceed a certain cap even if the index goes higher, and your rate of return won’t fall below zero even if the index drops significantly. This means your money will never decrease in value while it’s in the account, and it can grow with a rising index. Once you earn interest, it won’t be lost due to negative market changes. Indexed Annuities offer low market risk, potential growth, and a guaranteed income.
The option to receive lifetime income from an Indexed Annuity is completely up to you. An Indexed Annuity can also be used to save and park your money for retirement because it offers more security than investing directly in the stock market, while still providing more growth potential than money market accounts (such as savings accounts or CDs).
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