Understanding Fixed Indexed Annuity Plans

What Are Fixed Equity Indexed Annuities?

At times fixed index annuities are also known as equity indexed annuities. It's crucial to know these two names refer towards the exact same point. They're, basically, a sort of annuity where the owner's acquire or loss will be tied to some sort of market place index. Needless to say, you need to study the terms of any annuity product that you are considering. I am explaining the fundamentals of a typical contract, but plans can differ quite a little.

Fixed annuities are in fact sold by insurance coverage firms. They may be considered an insurance product. They combine some attributes of insurance coverage and a few functions of investment goods.

A single extremely widespread index would be the S&P 500. This is an index of the gains or losses of the stock exchange. When the stock market has a good year, and the index goes up, gains are going to be higher. During bad years, when the index goes down, gains are going to be much lower.

Guaranteed Returns

Notice that I wrote that gains fixed index annuities  might be lower during declining years. Not surprisingly, it truly is possible for a marketplace index like the S&P 500 to become negative. Stock market investors can lose money during declining periods. However, one particular of the key functions of a fixed annuity is a guarantee so the annuity owner will not lose money during bad years. A typical solution may have a 1 or two percent guaranteed return. This means that the owner will not lose money, even if the index becomes negative during a negative growth stock period.

Profit Limits

You should have a guaranteed return, but your profits may be limited. Your contract will probably also specify a market cap and participation rate. The participation rate puts a limit on the amount of gains that the owner can enjoy as profit. The industry cap limits the market place index rise that the owner can profit from.

This means that the owner will not enjoy the full benefit of a positive marketplace index. If you purchased stocks you would be able to do that. However, you have to balance the profit limits against the fact that you just get guaranteed returns when the stock marketplace declines.

Early Surrender

Most contracts will have an early surrender penalty. The surrender period may last for years. This can be a serious disadvantage if you do not intend to keep the annuity for the full length of this period. Most annuity owners intend to treat their item as a long term investment.

Are Fixed Equity Index Annuities A Good Deal?

You'll need to consider the pros and cons of these items for yourself. They are usually viewed as very safe, and do have the ability to give you higher returns than other safe investments. On the other hand, you'll need to commit to an annuity for a long time in order to enjoy the benefits. While they may guarantee a minimum return, you may never enjoy the full returns you could get on the stock industry.