Fixed Index Annuities

A Fixed Index Annuity is also issued by an insurance company. Like fixed annuities, they also protect against loss and can offer a fixed rate of return. However, they also offer the ability to generate interest by virtue of earning interest based on changes in a market index (ex: S&P 500), which measures how a particular index performs, usually over one year’s time. The interest is guaranteed never to be less than zero, even if the index goes down, which offers principal protection. 

Additionally, Fixed Index Annuities may also offer “Living Benefits”, which are guarantees issued by the insurance company to pay a stream of payments over a set period of time which cannot be outlived. Unlike annuitization, this feature has an “accumulation period”, where a separate account (aka, the “income account”) accumulates at a rate set by the company, regardless of whether or not there is actual gain credited to the contract by virtue of the index. After a minimum duration of accumulation, an income stream may be taken from the income account, usually guaranteed for the life of the owner/annuitant. Further, some companies offer an “enhanced income stream”, should the owner/annuitant fail 2 of 6 ADL’s (activities of daily living). This stream may be for a limited time or longer, depending on the company. Regardless, this benefit can prove to be quite valuable.