June 27, 2022
Q. What are Fixed Index Annuities?
A. These annuities are probably the most complex. The best way for me to explain them is to say they are a hybrid of a fixed and variable annuity; which in and of itself sounds rather perplexing.
The moving parts of a fixed index annuity include:
Minimum Guaranteed Interest Rate PLUS a “credit” rate that is connected to some particular market index (such as the Russell, S&P, etc.)
Spread - this is the minimum return that has to happen on the index you’ve selected BEFORE you will receive a credit. So, if the spread is 2%, then the index will need to gain at least 2% that year before you get credit. As an example, if the index only rises by 1%, then you get no additional credit; however, if the index rose 8%, you only get 6%
Cap - maximum amount you can earn in a given year, regardless of how well the index you selected performs. For example, if you have a cap rate of 15% and the index you are in has a 20% rate of return, you will not get credit for the top 5% for that contract year.
NOTE: Some contracts have a spread and a cap
Participation Rate - this states a maximum % you will get credited. For example, if the participation rate is 75% and the index increases 10%, then you would get a 7.5% credit for that year.
Protection Level - some fixed indexed annuities will protect up to a certain correction level; for example, if the index you selected to get a credit rating on, drops by 10%, you do not “experience” that correction. If it drops 20%, then you do not recognize the first 10%, but then the next 10% would be reflected.
The benefits of these types of annuities are that they do allow for some market participation without some of the volatility, but because they are an insurance product, not all States have the same exact products and not everyone should have this product.
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