What Are Indexed Annuities? | Fixed Annuity
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An indexed annuity is a fixed annuity, either immediate or deferred, that earns interest or provides benefits that are linked to an external equity reference or an equity index. The value of the index might be tied to a stock or other equity index. One of the most commonly used indices is the S&P 500, which is an equity index.
The value of any equity index varies from day to day and is not predictable. When you buy a fixed indexed annuity you own an insurance contract. You are not buying shares of any stock or equity index. NAIC Guide & Quotes
Indexed annuities are different from other fixed annuities because of the way it credits interest to your annuity's value. Some fixed annuities only credit interest calculated at a rate set in the contract. Other fixed annuities also credit interest at rates set from time to time by the insurance company.
Indexed Annuities credit interest using a formula based on changes in the index to which the fixed indexed annuity is linked. The formula decides how the additional interest, if any, is calculated and credited. How much additional interest you get and when you get it depends on the features of your particular fixed indexed annuity.
Indexed Annuity Questions You Should Ask. Pros and cons. 2 minute Income Annuity Videos
National Association of Insurance Commissioners Buyers Guide with Appendix for: Indexed Annuities
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Research reveals participation rates with no caps can credit higher indexed annuity rates.
The participation rate decides how much of the increase in the index will be used to calculate index-linked interest. For example, if the calculated change in the index is 10% and the indexed annuity participation rate is 80%, the index-linked interest rate for your fixed index annuity will be 8% (10% x 80% = 8%). A company may set a different participation rate for newly issued index annuities as often as each day. Therefore, the initial participation rate in your fixed annuity will depend on when it is issued by the company. The company usually guarantees the participation rate for a specific period (from one year to the entire term). When that period is over, the company sets a new participation rate for the next period.
Some indexed annuities guarantee that the participation rate will never be set lower than a specified minimum or higher than a specified maximum.