Annuity’s Third Choice – The Indexed Annuity
There was a time when consumers were faced just two choices when it came to choosing annuity contracts. The fixed annuity, which is capable of providing an investor with a reliable and steady income, was a favorite for those involved in retirement planning. With a variable annuity, the account value is based on the performance of individual stocks in the portfolio and this gives the investor the ability to hedge any inflation risk.
Now there is a third choice called the fixed indexed annuity. It was created to offer investors less risk than seen with a variable annuity but more growth than a fixed annuity. Indexed annuities are not really as complicated as they sound at first.
Anyone who understands the fundamentals of how an annuity works and has had annuities explained to them already has the basic knowledge needed to understand everything about an indexed annuity. An equity index simply takes into account additional factors. Like a variable annuity, the indexed annuity is tied to the market performance but it is not completely dependent upon its fluctuations. With a variable account, as soon as the investment portfolio sees a decrease, the value of the account decreases as well.
With an indexed annuity, there is room for some market participation by the investor. The value of the account is directly related to the index and it will increase when the index tied to it increases. Even during those times when the market goes down, there is a minimum return that will be realized. In some cases the return is 0% but the advantage with this type of investment is it cannot dip below that and go negative. As a result, your account will react to any index increases but will not decrease during a down market. To offset those times when the market is down, the investor is able to benefit from a predetermined portion of that growth. How much the investor can participate in will be determined by spreads, participation rates and spreads.
Related posts: