At one point, investors had two options; these were either traditional or variable annuities. Traditional annuities were met with several complaints. One of them was that the annuity account wasn’t tied to the markets, so investors couldn’t make money when it went up. And while variable annuities allowed for investors to reap the benefits of a rising market, they were also faced with high commission and risk; all because the market could go down. To solve this problem, life insurance companies combined the two into what we know as the fixed indexed annuity.
So what exactly is this annuity, and what are the benefits? These annuity accounts allows people to have an annuity that is associated with the stock market. The index that these types of annuity accounts are often tied to is the S&P 500 index, although others can be used based on the life insurance provider or the preferences of the investor.
These annuities aren’t as risky as a typical variable annuity. This is because they have certain “caps” tied to the position of the market. When the markets start to fall below capital level, this type of annuity will prevent investors from losing money by putting a limit on how much money can be lost. However, like many good things, there’s a catch; there is also a cap on how much one can earn when markets go up. This is put in place so that life insurance companies will have money to recover after a down market. Not only can your index growth be limited by caps, but it can also be limited by spreads or participation rates. Your account will be created based upon the structure of one’s individual annuity, and may change between insurance providers.
However, despite their close ties to the market, fixed index annuities act much more like a fixed annuity instead of a variable annuity. Along with interest rate adjustments, these annuities will often give bonuses to accounts depending on the current position of the stock market.
Fixed index annuities allow for investors to make money from the economy without much risk. However, since life insurance companies put caps on index growth, it’s very important that you research the available annuity accounts before deciding what’s best for you.