What is a Fixed Indexed Annuity
Fixed indexed annuities (FIA) are a form of fixed annuity that earns interest due to changes in a market index, measuring the performance of the market or part of the market. The interest rate, even if the market goes down, is guaranteed to never be less than zero.
The insurance provider can enforce a limit on the amount of interest you can earn in a specified period, to help balance the value of the downside protection. But again it’s important to remember that you can’t lose money based on declines in the market. It is that peace of mind that makes indexed fixed annuities so appealing.
How Does It Work?
Fixed indexed annuities typically provide you with a choice of methods to possibly grow your money: An option for fixed interest rates using index-based options for crediting your interest on a cap or participation rate approach.
1. The Fixed-Rate Strategy
The fixed-rate strategy earns a guaranteed interest rate over one year. The interest rate is declared on the anniversary of your contract at the time you purchase your contract and yearly renews on the current new rate.
2. Index-Based Approaches
With index-based approaches, your money will rise according to one or more market indices, such as the S&P 500 ®. The interest rate that you can earn is usually calculated over a predetermined period and may vary based on the annuity features, including the option of allocating your money to a strategy based on a cap or participation rate.
A cap rate is an upper-interest limit that can be credited over the term. A participation rate is also an upper limit on what can be credited but is based on a percentage of the performance of the index. Cap rates and participation rates are fixed at the time of purchase and reset after each contract term.
The safety of a floor protects your principal and your earnings. The floor prevents a loss of value to your annuity even if the index decreases during your period. Your principal is protected, and any interest credited. You can’t lose money based on performance at the market.
Why Opt For a Fixed Indexed Annuity?
As part of your overall financial strategy, a fixed indexed annuity can be a smart choice for several reasons:
The formulas used by insurance companies sometimes mean that interest added to your annuity is based on only part of an index change over a specified period.
Participation rates, cap rates, and spread rates are all terms that explain how the amount of interest applied to your annuity may not represent the change in its entirety. But if the index goes down, 0 interest is added to your annuity over that period. Then, your annuity value will not go down until you withdraw the money.
When you buy an indexed annuity, you don’t directly invest in the market or the index. Some indexed annuities offer you more than just one choice of index. Many indexed annuities also offer the choice of placing part of your money in a fixed interest rate account, with a rate that will not change over a given period.