Not very long ago, investors had two options when it came to annuities. First one was variable annuity and the second one was fixed annuity. Thereafter a third type of annuity product was designed by annuity companies which is known as equity indexed annuity. An indexed annuity is designed to give a return which is close to important indices such as S&P 500 or the Russel 1000 Index. Investors who have parked their funds in index annuities can indirectly participate in the markets. Let us find out some of the other features of Index annuities and also the genre of investors for whom this product will make a good fit. This product is definitely a good fit for investors who have a high risk appetite. Imagine this scenario. An investor who has invested in indexed annuities can expect a rate of return which is 50% to 60% of the underlying index. However, if the indices are not performing well then the investor’s rate of return for the annuity can take a serious hit.
The factor known as “participation rate” specifies the level at which the index annuity owners will participate in gains in the index. Consider this example. If the participation rate of an index annuity is 80%, then it means that for every 10% rise in that particular index, the indexed annuity account value will rise by 8%. If the index declines, the investor’s original principal remains intact and guaranteed by the annuity company.
What we have with an indexed annuity is an investment opportunity more conservative than investing in the underlying index because the original principal is guaranteed. However, the investor also cannot earn as much as being fully exposed to the index in a fund such as an index fund.
Not only is the original principal guaranteed, some insurance companies also give an assurance that no matter what the state of the stock market would be like, the annuity would always increase in value albeit by a small percentage (e.g. 2 % to 3% annually). This is made possible by the spread that insurance companies make on the funds. The actual income earned is lesser than what is credited into the investor’s annuity fund. Indexed annuity policies are good investment options provided you understand all the features of the product that you are buying. Because of the different products offered, get assistance from an experienced retirement advisor.