Learning Center

Fixed Index Annuities

Fixed index annuities help maximize both growth and protection for retirement dollars. Contract owners share in the increase of a stock market index but are not affected when the index declines. This type of annuity has become very popular over the last decade because of its principal protecting features. There are many different kinds of fixed index annuities, and it is essential that you choose the right one to maximize its capabilities and interest- earning potential.

Time Period

When you buy an annuity, you are agreeing to hold the contract for a certain time period. The time period can be as short as one year and as long as forty years. Annuity contracts typically fall between five, seven, and ten years.

A great benefit to a fixed index annuity is that during the time period you are able to access your money without having to surrender the entire contract. The best contracts allow you to take out 10% per year of the total contract value or premium paid. You are able to have the 10% automatically deposited into your checking account each month or at the frequency of your choosing. There is typically no limit to the number of withdrawals you can take, just as long as it does not exceed the 10% free withdrawal amount in any one year. Although 10% is the typical free withdrawal amount, Fixed Index Annuities are completely liquid minus a surrender charge. This allows the contract holder the option of fully surrendering the contract at any time. The most popular fixed index annuities allow you to take your annuityfs full accumulation value at the end of the time period without penalty.

Crediting Methods

A fixed index annuity is different from other annuities because of the way it credits interest to the annuity’s value. Some annuities will credit interest calculated at a set rate in the contract, while other annuities interest may vary due to fund performance. A fixed index annuity credits interest based on changes in an external index to which the annuity is linked. Most fixed index annuities allow you to choose from a variety of different indices including:

  • S&P 500
  • Nasdaq 100
  • Dow Jones EURO STOXX 50
  • Barclays Capital U.S. Aggregate Bond
  • Russell 2000

Although external indexes may affect your contract values, the contract does not directly participate in any stock or other investments. You are not buying bonds, shares of stocks, or shares of an index fund, but your interest may be based on the performance of these asset classes. This is why in a good Fixed Index Annuity you can benefit from the increases of a market index, but not the losses.

Monthly Caps

Most index annuities put an upper limit, or cap, on the index-based interest. This is the maximum amount of interest the annuity will earn per year. One popular type of fixed index annuity cap is called the monthly point-to-point or monthly-sum cap.

Here is how it works: If you have a monthly cap of 2.5%, you are credited the increase in the index for that month a maximum of 2.5%. If the index did 5% in one month, your monthly interest would equal the cap. At the end of the year, all of the months are tallied and all applicable increases are added to the value of your annuity. A monthly cap of 2.5% can equal a total maximum increase per year of 30% (2.5% x 12 months). So with a monthly cap of 2.5% the most you could make in any one year would be 30%, which is the maximum increase. Most fixed index annuities have a monthly cap of 2% or greater.

The information and opinions provided are provided by third parties and have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Protected Assets nor is it intended to be used as the sole basis for financial decisions.

The Protected-Assets web site offers links to a variety of sites maintained by third parties. In accessing these sites, you are leaving the Protected Assets web site. These sites are managed by organizations that may or may not have a business relationship with Protected Assets. These links are only offered for use at your own discretion. Protected Assets does not provide, and is not responsible for, the product, service, or overall website content available on third-party sites. Nor is Protected Assets liable for any direct or indirect technical, system or any issues arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site.