A fixed index annuity might be the perfect fit for you if what you’re most looking for is principal protection. Here’s everything you need to know about this common insurance product.
A fixed index annuity is unique in that it offers some market growth while carrying less risk. It’s kind of a cross between variable and fixed annuities. Some of your return is dependent on the performance of a market index (like the S&P 500), but it also comes with a guaranteed minimum payout. Any interest earned accumulates on a tax-deferred basis until you take money out.
A fixed index annuity has a guaranteed minimum payment which is determined by the interest rate floor (or the minimum interest rate) set by the insurance company. Regardless of how the market performs, the interest rate floor must be honored. In other words, a 0% interest rate floor means your principal is protected, even if the insurance company’s investments falter. This is an obvious upside to this type of product.
On the flip side, something a little less attractive is that with reduced risks comes less potential for high returns. Why? Most insurance companies will cap your gains to protect themselves from losses.
Though every contract is different, here is how a fixed index annuity generally works:
There are a lot of factors that can go into making this decision. You and your financial advisor should consider potential goals and what kind of riders make sense for you (optional enhancements to your contract at an additional cost). Usually, someone who is interested in a fixed index annuity is looking for future money, not cash-in-hand today.
If you’re looking for more help on annuities or retirement planning, here are some of our favorite resources:
Originally published May 11, 2023
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