For many people, the fixed annuity is an excellent retirement planning instrument. It allows the investor to convert a sum of money into periodic and consistent payments of income, and protects the principal of the investment from market loss. This stream of income provides retirement income, funding dollars, and an otherwise reliable stream of money. One of the features of this type of fixed annuity is both its greatest strength and weakness, the fixed rate. Most investors like this product for its safety and lack of volatility, but it is these same attributes that take away some of the reward that other products offer. To offer a mix of both safety and growth, the insurance companies have introduced a relatively new annuity product to the market, the fixed index annuity.
Fixed index annuities are a way to provide market participation to your fixed accounts. And while the annuity does not necessarily participate in market losses, the contract is design to benefit the annuity owner during market upswings. The fixed portion of the account typically allows the contract to maintain a guaranteed minimum interest rate which is almost always greater than 0%. This means that no matter what the market does, you are guaranteed no loss of principal in your account.
The upward participation on this type of annuity comes in the form of profit sharing with the insurance company when the market increases. The contract is designed to provide the annuitant a portion of the market increases, based on the crediting option of the account. Typical crediting options include caps, spreads, and participation rates. These basically limit the amount of growth your account can participate in, allowing the insurance company the ability to balance out their losses from down years in the market. Carefully research the terms of your contract before purchase, and make sure that you understand the crediting terms associated with your account. All annuity contracts are not created equal and will have varying degrees of success depending on how they are designed.