Index Annuity Overview

The returns may be higher than fixed instruments such as CDs, money market accounts, and bonds but not as high as market returns. Equity Index Annuities are insured by the State Guarantee Fund which is similar to the insurance provided by the FDIC. The guarantees in the contract are backed by the relative strength of the insurer.

Typical Fixed Indexed Annuity Features - (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 fund are directly invested in any equities market. It simply looks at the markets return over a period of time (usually one year intervals) and credits the annuity based on the markets performance..
• Minimum Guaranteed Rate — As with all fixed annuities, a minimum rate of return is provided in the contract. This insures 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 — Ideal of 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 — Withdraw earnings early without penalties up to certain amounts.
• 1-10 Year Term — Index 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 — 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.

Fixed Index Annuity Performance

In looking at historical data, index annuities often out-perform 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 Index Annuities A good index annuity shares the best features of fixed and variable contracts. But, index annuities come in several flavors, making comparison shopping difficult. Finding the best index 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. Index 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 index 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 index 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 fixed annuity. If you need a guaranteed income stream, consider a Fixed Annuity instead.



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