What are Fixed Indexed Annuities?
Fixed indexed annuities are insurance products that provide a guaranteed minimum interest rate, while also offering the potential for higher returns based on the performance of a stock market index. They are a hybrid between fixed annuities and variable annuities.
Unlike variable annuities, which invest in mutual funds and other securities, fixed indexed annuities invest in a stock market index, such as the S&P 500. However, they do not directly participate in the market, so you are protected from market downturns.
Instead, your return is based on a formula that calculates a portion of the index's performance.
How do Fixed Indexed Annuities Work?
When you purchase a fixed indexed annuity, you pay a lump sum to an insurance company, which then pays you a fixed amount of interest over a specified period of time. This period of time is known as the "accumulation phase." During this phase, your money grows tax-deferred, meaning you don't have to pay taxes on the earnings until you withdraw them.
At the end of the accumulation phase, you can choose to start receiving regular payments from the annuity, known as the "payout phase." You can choose to receive payments for a set number of years or for the rest of your life. The interest rate you receive during the accumulation phase is based on the performance of the stock market index chosen by the insurance company. If the index performs well, your interest rate will be higher, and vice versa. However, most fixed indexed annuities also have a guaranteed minimum interest rate, which means that you are protected from market downturns.