What Is an Indexed Annuity?
An indexed annuity offers the potential for higher returns than a fixed annuity while still protecting your principal from market losses. Here's how they work.
How an Indexed Annuity Works
An indexed annuity (also called a fixed indexed annuity or FIA) credits interest based on the performance of a market index — such as the S&P 500 — up to a cap rate. If the index goes up, you earn interest (up to the cap). If the index goes down, you earn 0% — your principal is protected.
Participation Rates and Cap Rates
Indexed annuities have two key features that determine how much of the index's gain you receive: the participation rate (the percentage of the index gain you receive) and the cap rate (the maximum interest rate you can earn in a period). For example, with a 100% participation rate and a 10% cap, if the S&P 500 gains 15%, you earn 10%.
Principal Protection
One of the most important features of an indexed annuity is that your principal is protected from market losses. Even if the index falls 30%, you earn 0% — not -30%. This makes indexed annuities appealing to people who want market-linked growth potential without the risk of losing their savings.
Tax-Deferred Growth
Like fixed annuities, indexed annuities grow tax-deferred. You don't pay taxes on gains until you withdraw the money, allowing your savings to compound more efficiently.
Who Should Consider an Indexed Annuity?
Indexed annuities are well-suited for people who want more growth potential than a fixed annuity but don't want to risk their principal in the stock market. They're popular with pre-retirees and retirees who want to participate in market gains while protecting against losses.
Learn More About Indexed Annuities
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