Indexed Annuities

Indexed Annuities

Indexed Annuities

An indexed annuity is simply a type of annuity that earns interest on a specific equity index. Insurance companies provide indexed annuities and they offer a guaranteed minimum so that when the stock index performs poorly, the annuitant gets a reduced risk of loss; together with traditional fixed annuities, indexed annuity form the two types of fixed annuities.

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Indexed annuities begun operation in the mid 1990’s and since then the market has grown into a multi-billion dollar industry with dozens of insurance companies offering the package.

Purchasing an indexed annuity does not imply owning shares of a stock or equity index but rather makes you acquire ownership of an insurance contract. Indexed annuities provide a certain percentage of interest on the premiums usually not exceeding 90%.

Indexed annuities also have surrender charges ranging from 20% and below for a period of up to 16 years. It is important to note that, indexed annuities are rather long-term investments even though they provide a fee without penalty, which can be withdrawn on each year.

Just like all traditional fixed annuities, withdrawal from an indexed annuity is enabled at any time subject to a surrender charge. The surrender charge is cleared if the penalty-free withdrawal has already been exhausted and the policy is still within the surrender charge period.

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The way Indexed annuities credit interest to your annuity’s value makes it different from other fixed annuities because other fixed annuities credit interest calculated at a rate normally set in the contract. At other times, the insurance companies set rates to determine the interest credited on fixed annuities.

In case of sudden death by the annuitant, the beneficiary of the annuity will receive the remaining value of the policy. Some indexed annuities guarantee a certain participation rate that will never be set higher than a specified maximum or lower than a specified minimum.

Recently, several indexed annuities have been issued with a rider made in a design that supplies an income payment over a lifetime to the policyholder without requiring annuitization. This leaves the policyholder in full control of the account balance.

The amount of income produced by the income rider normally depends on several factors; mostly being the age of the policyholder at the time of opting for income, the specified rate of accumulation as well as the length of time for accumulation given to the income.

Every time the policyholder receives an income payment, the indexed annuity account value decreases by that same amount. Income riders providing lifetime income generally enable the policyholder to supplement their income.

This mostly becomes efficient in retirement because the policyholder is able to supplement income without possibly outliving their money because even if the indexed annuity’s account value falls to zero, the income payment from the income rider will continue until the death of the policyholder.

These reasons therefore make indexed annuities a wise investment for people visualizing a stress-free retirement. However, with other annuities varying slightly, it is important to research and learn more about the best choice to make when you decide to invest in annuities.

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