What Is an Indexed Annuity?
An indexed annuity is a fixed insurance product that credits interest to the client's account based on the performance of a market index—most commonly the S&P 500. Unlike a fixed annuity, which credits a predetermined rate set at issue, an indexed annuity's crediting rate varies each year based on index performance. Unlike a variable annuity, the client bears no direct market risk: if the index declines, the client is credited zero, not negative. The floor is always zero.
This creates a distinctive value proposition. The client participates in market growth when conditions favor it, yet is insulated from full market loss when conditions don't. In exchange, the client accepts limits on upside growth through participation rates and cap rates. The insurance company's cost of providing this protection is reflected in those limitations. For the right client, this tradeoff is powerfully attractive.
Principal Protection
The client's original investment is protected from direct market loss. Unlike variable annuities, indexed annuities cannot lose value because of negative index performance. The zero floor is a contractual guarantee.
Index-Linked Growth
Returns are tied to a market index. When the index rises, the client receives a percentage of that gain (subject to caps or participation limits). When the index falls, the client receives zero—not a loss.
Guaranteed Income Options
Optional riders allow the client to convert accumulated value into guaranteed lifetime income. The income base may grow at a guaranteed rate during accumulation, independent of account value performance.
