What is an Indexed Annuity?

An Indexed Annuity is a type of annuity contract that provides a combination of security and market-linked growth. Its returns are tied to a stock market index, such as the S&P 500, but without the risk of losing principal if the market declines. It combines the safety of a fixed annuity (principal protection and minimum guarantees) with the growth potential of a variable annuity (market participation).

Unlike traditional investments, indexed annuities do not actually invest in stocks. Instead, the insurance company calculates interest credits based on the index’s performance.

How It Works?

Indexed annuities track an index but do not directly invest in it. Interest is credited based on the index’s performance but is subject to caps, participation rates, or spreads.

• If the index rises, you earn a portion of the gains, typically limited by a cap rate (maximum interest) or participation rate (percentage of the index’s return credited to your account).

• If the index falls, your principal is protected, and you may receive a minimum guaranteed return (often 0%, meaning no gains but no losses).

This means you do not lose money when the market drops but can benefit from market gains (within set limits).

Key Benefits

Principal Protection: Your money is safe from market downturns (worst case: 0% return, but no loss).

• Growth Potential: Earn interest based on market performance, often higher than traditional fixed accounts.

• Tax-Deferred Growth: No taxes on earnings until withdrawn, allowing faster compounding.

• Lifetime Income Option: Convert your annuity into guaranteed lifetime income, ensuring you never outlive your savings.

• Death Benefit: In most cases, if you pass away before receiving income, your beneficiary receives the account value without probate.

Practical Example

Imagine investing $100,000 in an indexed annuity linked to the S&P 500 with a 50% participation rate and full principal protection:

• Year 1: The S&P 500 rises 20%. You receive 50% of that increase, meaning your annuity grows 10% (+$10,000).

• Year 2: The S&P 500 drops 15%. Your account remains unchanged (0% credit, no loss).

This way, you lock in gains from positive years while avoiding losses in negative years.

Comparison with Other Annuities

Who Should Consider an Indexed Annuity?

• Pre-retirees who want to protect savings while still participating in market growth.

• Conservative investors seeking moderate returns with downside protection.

• Retirees looking for a guaranteed lifetime income stream.

Costs & Fees

• Typically no direct management fees, but interest earnings are reduced by caps or participation rates.

• Surrender charges apply if you withdraw funds early, often 5–10 years after purchase.

• Income riders (optional) may provide lifetime income but come with an additional cost.

Final Thoughts

Indexed annuities provide a safe and effective way to grow and protect your money, offering a balance between security and potential returns. They are ideal for those seeking growth without market risk and a reliable income stream in retirement.