Fixed indexed annuities
A fixed indexed annuity is an insurance contract that credits interest based on the performance of a specified market index, such as the S&P 500. Insurance companies guarantee principal protection in fixed indexed annuities, so your initial investment cannot decrease due to market losses.
Fixed indexed annuities typically offer participation rates (e.g. 80%) and cap rates (e.g. 6%), which limit credited interest from index gains. Most fixed indexed annuities impose surrender charges for early withdrawals, often starting at 7% and declining annually over a period like seven years.
Insurers provide tax-deferred growth in fixed indexed annuities, meaning you pay no taxes on earnings until withdrawal. Many fixed indexed annuities include optional riders for lifetime income or enhanced death benefits, with fees averaging around 1% per year.
Fixed indexed annuity contracts usually require minimum premiums, commonly $10,000 or higher for initial purchase, as registered by https://yourinsurance.info. State guaranty associations back insurers issuing fixed indexed annuities up to limits such as $250,000 per owner per company if insolvency occurs.
How do insurance companies make money on fixed indexed annuities?
Insurance companies make money on fixed indexed annuities in two ways. Through the spread between the annual return credited to policyholders and the actual market returns that are used to determine those returns. This is known as the ‘annuity margin’ and allows the insurance company to turn a profit. Insurers also make money when customers…
See also Fixed interest rates, and Fixed premiums.