Indexed Annuities
The middle ground between security and growth potential for your retirement
What is an Indexed Annuity?
An indexed annuity (also called a fixed-indexed annuity or equity-indexed annuity) is a retirement product that offers a unique blend of security and growth potential. It provides returns linked to the performance of a market index—such as the S&P 500—while protecting your principal from market losses.
Think of it as a middle ground between fixed annuities (which offer guaranteed but conservative returns) and variable annuities (which provide higher growth potential but with market risk). With an indexed annuity, you can potentially earn higher returns when markets perform well, but you're protected from losses when markets decline.
Like other annuities, indexed annuities offer tax-deferred growth and the option to convert your savings into a guaranteed income stream for retirement.
Current Market Features
In today's market environment, typical indexed annuities offer:
Cap Rates
5.5% - 8.5%
Annual point-to-point crediting
Participation Rates
40% - 100%
Varies by crediting method
Surrender Periods
5 - 10 Years
Typical contract duration
Bonus Rates
1% - 10%
Premium bonuses on select products
*Rates and features vary by insurance company, product, and state. Data as of April 2025.
Is an Indexed Annuity Right for You?
An indexed annuity might be a good fit if you:
Want protection from market downturns
Desire potential for higher returns than fixed annuities
Are within 5-15 years of retirement
Want tax-deferred growth potential
It might not be ideal if you:
Need access to your money in the near term
Want to fully participate in stock market gains
Prefer simple, easy-to-understand products
How Indexed Annuities Work
Understanding the key components that determine your returns
Linked Market Index
Indexed annuities track a market benchmark like the S&P 500, Nasdaq-100, or Russell 2000. Your returns are based on how this index performs over a specified period, but with certain limitations and protections.
Unlike investing directly in these indices, you don't actually own any stocks or funds—the index is simply used as a reference point for calculating your returns.
Principal Protection
One of the most attractive features of indexed annuities is that your principal is protected from market losses. If the linked index declines in value, your account is credited with a 0% return rather than a negative return.
This downside protection comes from the insurance company's guarantee, which is backed by the financial strength of the issuing company.
Cap Rates
A cap rate is the maximum return you can earn in a given period, regardless of how well the index performs. For example, with a 7% cap, if the index returns 15%, you'll only be credited with 7%.
Cap rates can be adjusted by the insurance company for new money or at the end of the rate guarantee period, usually based on market conditions.
Participation Rates
A participation rate determines what percentage of the index's gains will be credited to your annuity. With a 70% participation rate, if the index returns 10%, your account would be credited with 7%.
Some products use participation rates instead of caps, while others may use both in combination to determine your credited interest.
Spreads/Margins
Some indexed annuities use a spread or margin instead of (or in addition to) caps and participation rates. A spread is a percentage that's subtracted from the index return before crediting interest.
For example, with a 3% spread, if the index returns 9%, your account would be credited with 6%.
Crediting Methods
The crediting method determines how and when index gains are calculated and credited to your account. Common methods include:
- Annual point-to-point: Compares index values from the beginning and end of a 1-year period
- Monthly sum: Adds up monthly index changes (often with a monthly cap)
- Monthly average: Compares the starting value to an average of monthly values
The Indexed Annuity Process
Purchase
You purchase an indexed annuity with either a lump sum or a series of payments. Your money goes into the insurance company's general account.
Index Performance Tracking
The insurance company tracks the performance of the linked index according to the crediting method specified in your contract.
Interest Crediting
At the end of each crediting period (typically annually), the insurance company calculates your interest credit based on the index performance, subject to any cap, participation rate, or spread.
Accumulation
Your account grows tax-deferred over time. Each new interest credit is added to your previous accumulation value, creating a compounding effect.
Distribution Options
Eventually, you can choose to take withdrawals, annuitize your contract for guaranteed lifetime income, or leave the value to your beneficiaries.
Indexed Annuity Calculator
See how different caps, participation rates, and spreads affect potential returns
Pros and Cons of Indexed Annuities
Understanding the advantages and limitations
Advantages
Principal Protection
Your initial investment is protected from market downturns, providing peace of mind in volatile markets
Growth Potential
Opportunity for higher returns than traditional fixed annuities or CDs, especially in rising markets
Tax-Deferred Growth
Earnings grow tax-deferred until withdrawal, potentially resulting in higher compounded growth
Lower Fees
Generally have lower explicit fees than variable annuities, with most costs built into the rate crediting methods
Income Options
Can be converted to guaranteed lifetime income, creating a personal pension for your retirement
Limitations
Capped Returns
Caps, participation rates, and spreads limit how much you can earn when markets perform exceptionally well
Limited Liquidity
Surrender charges typically apply for 5-10 years, limiting access to your money without penalty
Complexity
Crediting methods, caps, participation rates, and other features can be difficult to understand and compare
No Dividends/Yield
Only tracks price movements of the index, not dividend income that would be earned by direct investors
Potential Rate Changes
Caps, participation rates, and other features can be changed by the insurance company after the initial guarantee period
Frequently Asked Questions
Common questions about indexed annuities
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