Indexed Annuities

Indexed Annuities

What, When, and Why.

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What…The Basics:

An indexed annuity, similar to any other annuity, is a contract between owner (the investor) and issuer (the insurance company). The difference between an indexed annuity and other types is in the underlying investments; indexed annuities allow you to choose a specific index (such as the S&P 500, the Russell 1000, etc) to mirror.

Why Buy An Indexed Annuity?

The benefit of an indexed annuity is that investors can be a part of the “ups” of the market, with a guarantee that their initial investment will not drop below a certain floor. Indexed annuities allow investors to participate with the specified index to a certain level—the participation rate—ie, they will go up that percentage of what the index goes up. An example: the S&P rises by 10% in a year. The participation rate of your indexed annuity is 70%. Your accumulated value would thus go up 7%. Accumulated gains in an indexed annuity, like any other annuity, are tax-deferred until withdrawal. And if the index goes down by 10%–most indexed annuities allow for a floor that your investment will not go below. Of course, this benefit comes at a cost—fees for the guarantees that are higher than investing in the equities of the index, themselves.

Who Would Buy An Indexed Annuity?

Like other annuities, indexed annuities are complicated (based around the various guarantees, withdrawal provisions, spreads) and you should discuss their purchase with your financial advisor. Learn what options are out there, and be clear about what index you’d like to track and why. But indexed annuities can be a good long-term investment, for retirement—and are becoming more popular because of their close correlation and easy trackability to the major indexes.

Ask for a prospectus for any annuity you are considering, and be sure you understand the costs and penalties.