The Fixed Index Annuity is also referred to as an equity indexed annuity.  It is an  annuity that allows for the possibility for upside appreciation in the stock market, but protects against risk of loss to principal due to unexpected market changes. These annuities also guarantee a minimum interest rate regardless of future performance.  Each insurance company uses a different formula to calculate the rate guarantees they offer to investors.

The Terms Fixed Index Annuity and Equity Indexed Annuity often refer to the same product.

It is confusing for advisors and clients alike, so don’t feel bad!  The correct term, however, is Fixed Index Annuity as this is squarely an insurance product, and not a security.  The term ‘Equity Index Annuity’ infers an equity component and thus more in the realm of a security offering. While there is a push to  regulate these annuities as securities, as yet this has not happened.

The Straight Talk On Indexed Annuities:

In a word, Yes- they are a good deal, but for the right investor and right reason.  We can help you decide if it’s the right thing for YOU.

In addition to the Pros and Cons of Fixed Index Annuities page, we have an entire category of posts for Fixed Index Annuities that opens up more on the topic and injects a bit more opinion than this informational page- please check it out.

 Fixed Index Annuity Highlights:

An indexed annuity balances the safety of a fixed deferred contract with the potential for gains of a variable product.  These annuities link account performance to a stock market index. While historically it’s true that the stock market offers the potential for higher returns, that upside always comes with potential risk. For conservative investments, fixed interest products prioritize safety and protection of principal, but that comes at the price of lower returns.

But over the long term, these returns often balance out, especially when volatility can wipe out years of gains. Hello 2008?  Be sure to understand how by reading Which 10% do you want… Investors constantly wrestle these forces of security and yield in every individual investment and in each portfolio allocation decision.

An indexed annuity is a great product that effectively produces gains for investors while minimizing risk.  They truly do provide a middle ground where performance meets safety and investors can experience the best of both worlds.

The equity index annuity typically tracks a stock market index, such as the S&P 500, NASDAQ, or Dow, with the rate of return usually being a set percentage of the increase the index shows over a set period, or a guaranteed minimum interest rate (whichever is higher).

Fixed index annuities are a very attractive annuity for many investors because the principal investment is protected and guaranteed from loss, while the potential for gains allows for some market participation without downside risk of loss.  But pay attention to the details! Each indexed annuity offers different components and characteristics.  Insurance companies vary:

  • The minimum amount you are guaranteed to earn,
  • The maximum amount you can earn,
  • The total percentage of upward movement in an Index that you can participate in,
  • The use of your accumulated funds once the annuity term is over.

For any fixed index annuity, it is important to clearly understand how the contract works, to ensure your selection is best suited to meet your future retirement needs.  Be sure to read through our Report for the Straight Talk on picking any indexed annuity product.

And remember, when a Fixed Index Annuity is coupled with a lifetime income rider, it’s typically referred to as a ‘Hybrid Annuity‘ and things can get involved in understanding the suite of benefits.  Please contact us for help understanding and selecting the best.

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