An equity-indexed annuity has attributes of both a fixed and a variable annuity account. Much like a variable annuity, interest gains will vary depending on the performance of the chosen index, but like a fixed annuity the principal and credited interest (gains) cannot be lost due to market fluctuations.
The big difference between variable and indexed annuities is that variable accounts rely on appreciation of volatile market assets like stocks and bonds. The owner has to buy low and sell high. Conversely, indexed annuities rely on interest gains tied to market performing indexes like the S&P 500®. The account does the buying and selling automatically and the interest gains can never be less than zero.
Indexed annuities are insured, cannot lose value, and have no direct stock or bond market exposure. Thus, these investment accounts are significantly different from variable annuities. This is advantageous for conservative minded investors who desire safety and the potential for higher returns.
Indexed Annuities Offer Higher Interest Potential
The stock market has been very unpredictable and extremely volatile over the last decade. Investors have lost untold billions and many are looking for safe and insured investment options. Fixed indexed accounts are a popular alternative to the overall markets as they avoid losses during market corrections while crediting interest during market upswings.
Equity indexed (also referred to as fixed indexed) annuities are unique in the manner in which they credit interest. Traditional fixed annuities credit interest daily based on the internal returns of the insurance company’s portfolio – much like a certificate of deposit.
Indexed accounts do not credit interest daily. Rather, the insurance company uses the same interest returns normally credited to a traditional fixed account to purchase option contracts.
The option contracts are tied to the S&P 500®, Dow Jones®, NASDAQ® or one of several other market indexes chosen by the account owner. The option contracts either increase in value (and credit interest to the account) or expire worthless. You are only risking your interest each year.