Overview of Indexed Annuities
The Common Features of Equity Indexed AnnuitiesEquity Indexed Annuities (also referred as Fixed Indexed Annuities) are a type of tax-deferred annuity whose credited interest is linked to an equity index; typically the S&P 500. An equity indexed annuity guarantees a minimum interest rate (typically between 1% and 3%), while also having the potential to participate in a portion of the market's upside growth.
Typical Fixed Indexed Annuity Features - (can vary with each individual product):
All annuities have three primary advantages: Tax Deferral, Avoidance of Probate, and a Guaranteed Income (optional) for a fixed period of time, or income for life. More specific reasons to invest in fixed and immediate annuities:
- Returns Linked to the Market — Rate of return is linked to an index like the S&P 500, although no funds are directly invested in any equities market. It simply looks at the market's return over a period of time (usually one year intervals) and credits the annuity based on the market's performance...
- Minimum Guaranteed Rate — As with every tax-deferred annuity, a minimum rate of return for equity indexed annuities is provided in the contract. This ensures that no matter how much the market drops, the account value will never decrease.
- Low Risk — Can't lose principal. Money can only be lost if you withdrawal monies prematurely or the insurer becomes insolvent and your investment exceeds state annuity insurance.
- Good Growth — Equity indexed annuities are ideal for investors looking for stock market growth and coverage against bad years. Good retirement vehicle.
- Variable Returns — Annual rate of return varies based on index performance.
- Hassle Free — No micro management. Sign the contract, pay the premium, start growing your nest egg.
- Vesting Schedule — An indexed annuity allows you to withdraw earnings early without penalties up to certain amounts.
- 1-10 Year Term — Equity indexed annuities are available for short, medium, or long terms.
- Tax Deferral —Pay nothing on interest earned until you cash out. Earn interest on the IRS's money.
- Unlimited Contributions — Invest as much as you'd like tax-free without the IRS breathing down your neck. Beats 401(k) and IRA.
- Life Insurance — Optional life insurance provision offers death benefits to loved ones. Save money on separate life policy.
- Inheritance — A fixed indexed annuity allows you to bequeath money to loved ones probate-free. Avoid estate/death taxes.
- Tax-Free Gifts — Gift up to $13,000 per individual, per year, tax-free. Gift money to an unlimited number of individuals.
In looking at historical data, a tax-deferred annuity such as an indexed annuity often out-performs investments that are traditionally thought of as higher-yielding, and this they do without exposing investors to undue market risk. Over periods of 10-20 years, an index annuity is guaranteed to shield your money from economic turmoil while averaging 7-10% returns. To see how your index annuity would have out-performed the S&P 500 from 1998-2008, follow along to: Index Annuity Performance.
Finding the Best Indexed AnnuitiesA good tax-deferred annuity shares the best features of fixed and variable contracts. But, index annuities come in several varieties, making comparison shopping difficult. Finding the best fixed indexed annuity is a matter of weighing four key contract provisions: participation rate, cap rate, minimum rate, and administration fees. To learn how these factors intermix and which ones should be prioritized, see Finding the Best Index Annuity.
Indexed Annuity Disadvantages
Every investment vehicle has its own set of unique pros and cons. Equity indexed annuities disadvantages include: early withdrawal tax penalties, their ordinary income status, administration fees, withdrawal fees, their vesting schedules, and the single-premium nature of their contracts. If any of these factors are deal-breakers, a fixed or variable annuity might be a better alternative. For an in-depth discussion of each index annuity disadvantage, see: Index Annuity Disadvantages.
Index Annuity Pitfalls
Navigating an index annuity contract can be tricky. As a result, nearly all common pitfalls occur from failure to read the sticking points. The most important provisions in any indexed annuity contract include: the participation rate, cap rate, minimum guaranteed rate, administration fees, and vesting schedule. You'll want to familiarize yourself with these factors to understand how to spot the most favorable terms.
Avoid getting stung. Learn about the specific mistakes associated with each contract provision by reading, Index Annuity Pitfalls.
Who Should Buy Index Annuities
The diminished liquidity of equity indexed annuities make them well-suited as retirement instruments. Investors looking to capitalize on market growth can do so with risking loss of principal. Investors with a horizon of 5+ years are ideal candidates for index annuities.
Although your principal is guaranteed at all times, income is variable and cannot be easily calculated into the future, as would be possible with a tax-deferred annuity such as this. If you need a guaranteed income stream, consider a Fixed Annuity instead.
Get a free apples-to-apples comparison of today's best equity indexed annuities by contacting a licensed annuity specialist. Secure your retirement today, Click Here.
- Fixed Annuity Features
- Fixed Annuity Performance
- Finding the Best Fixed Annuity
- Fixed Annuity Disadvantages
- Fixed Annuity Pitfalls
- Immediate Fixed Annuities
- Deferred Annuities
- Multi-Year Guaranteed Annuities
- Equity Indexed Annuity Features
- Equity Indexed Annuity Performance
- Finding the Best Equity Indexed Annuity
- Equity Indexed Annuity Disadvantages
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