What are Indexed Annuities?
Indexed annuities are a type of fixed annuity that offer a return linked to a stock market index, such as the S&P 500. They provide a unique blend of features, combining the security of fixed insurance contracts with the potential for higher returns than traditional fixed annuities.
How They Work
When you invest in an indexed annuity, your premium is often allocated in two ways: a portion may go towards a fixed account, providing a guaranteed interest rate, while the remainder is tied to the performance of a specified index. The insurer calculates your interest based on the index's performance over a predetermined period, typically one year.
Benefits
- Potential for Growth: Indexed annuities allow for growth linked to stock market performance, without the risk of direct investment.
- Downside Protection: They often include a floor, meaning you won't lose your principal even if the index performs poorly.
- Tax-Deferred Growth: Earnings grow tax-deferred until withdrawal, allowing for better compounding over time.
Considerations
While indexed annuities can offer attractive features, they may include caps on returns, withdrawal penalties, and complex terms. It's crucial for investors to read the contract carefully and consider their financial goals and needs.