InvestorQ : What is indexed annuity investments and how it is different?
Abigail Ghoshal made post

What is indexed annuity investments and how it is different?

Answer
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12 months ago


An indexed annuity is not general but a special class of annuities under which returns are from contributions that are based on a specified equity-based index. One can easily these annuities from insurance companies, and just like any other annuity, the payout under this is as per the annuity contract entered into.

Indexed annuities offer an opportunity to earn higher returns based on stock market performance while protecting investors against market declines. Though, the investors can also experience lower-than-expected returns due to fee-related deductions and combination of different caps on interest earned.

How does it work?
The rate of an indexed annuity is calculated as a percentage of gain in the Standard and Poor’s 500 Index (S&P 500). Actual percentage that is applied to the credit rate is based on the year-over-year gain in the index or the monthly average gain over a 12 month period. In a year when the stock index realizes a gain, a portion of the gain is credited to the account based on a participation rate dictated by the life insurer.

How it is different?
Under annuity investments, your principal is fully protected from the downside volatility of the market.
Gains under annuity investments are permanently locked in on the contract anniversary date.
An indexed annuity offers a variety of liquidity options so that the investor can have access to funds easily.
Many fixed annuities help shield money from annual taxation interest, as long as funds remain in the annuity.
Therefore, an indexed annuity is an investment option considered mostly by those near retirement or those who focus more on receiving a fixed income, rather than focusing on market growth.