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What is a Fixed Index Annuity?

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  • Written By: Luke Arthur
  • Edited By: Heather Bailey
  • Last Modified Date: 06 October 2018
  • Copyright Protected:
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    Conjecture Corporation
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A fixed index annuity is a type of annuity that provides retirement investors with a way to take advantage of the stock market and have a safe form of investment at the same time. With a fixed index annuity, investors will make regular payments to an insurance company over their working lives or they will make one large, lump sum payment. The money invested will be tied to a financial index to generate returns. At the same time, a minimum amount of return will be provided to the investor even if the index performs poorly. With this type of investment, investors should be aware of the costs involved and some of the potential drawbacks.

The fixed index annuity is a type of contract purchased directly from an insurance company. This investment vehicle is designed to provide safety and stability to investors during their retirement years. Once the contract is paid for and the individual retires, he or she will be able to receive a monthly payment for the rest of his or her life or for a specific period of time.

A fixed index annuity can be paid for in two ways. An individual could choose to make regular payments to the insurance company over his or her working life. Another option is to take a lump sum of money and pay it to the insurance company all at once.

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Once the money is invested, it will be put into an investment that is tied to a financial index such as the S&P 500. If the index performs well, it will provide good returns to the annuity as well. For example, if the financial index increases in value by 10%, the fixed index annuity will also receive 10%.

Fixed index annuities also have a minimum amount of return that can be generated each year. If the index only returns 2%, the account may be credited with a minimum of 4%. This allows retirement investors to take advantage of movements in the financial markets without having to risk everything.

When choosing this type of investment, individuals should be aware of the costs. Insurance companies will charge something on the front end of the transaction or take something out of the returns. One of the risks of this type of investment is that investors are depending on an insurance company to guarantee their retirements. If the insurance company went out of business, the individual could lose money that he or she has saved.

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