A fixed index annuity is a type of annuity (or retirement insurance contract) which offers an interest rate based on how investments are performing on the stock market. Like any other annuity, investments are made during the accumulation period with either a lump sum purchase or premiums paid over time. In keeping with the terms of the contract, a steady flow of payouts will begin when the accumulation period ends. Rather than locking in a fixed interest rate, the return on the investment will reflect how the portfolio performs on the stock market, to a degree.
When purchasing a fixed index contract, the buyer decides where to invest their money and can choose whether to invest in a single index or spread the investment out among several. Indexes like the S&P 500 or the Dow Jones Industrial Average will reflect how those investments perform. This information determines the interest rate of the annuity, in addition to other factors indicated in the contract.
When the time comes to turn your investments into steady income you will have to decide how long the money will need to last. The more payouts you receive, the lower the amount will be. You also have the option of withdrawing the money at once but there may be steep fees to pay. Most annuities have a surrender period of several years where the money can not be touched without significant penalties.
Fixed index annuities allow for a greater possible return but there will be a limit to the amount of growth allowed. There will be a limit or cap to your return with this kind of annuity. No matter how high the index return, your contract will state the maximum growth percentage allowable in a fiscal year. Another thing to be aware of is your participation rate, the percentage of your money which will actually be participating on the stock market. Not every dollar invested will be performing.
The good news is that these investments are usually protected against losses and may even have a guaranteed minimum interest rate. This means you can’t lose but you may not gain much and likely will have fees for this contract. Most contracts declare a loss floor of 0% meaning that if the stocks are not performing, you will be protected against loss.
Many investors like the amount of risk associated with the fixed index annuity. It offers the possibility of greater rewards without risk factors of a variable annuity. The return may be modest but so is the risk. Losses are limited, some tax-deferred growth is likely, and your money is protected against inflation. While the returns may be modest and certain fees may be higher, this is an excellent choice for those who wish to participate in the stock market with their annuity investments.
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