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Indexed Annuities – Assuring Guaranteed Minimum Returns

Normally offered by insurance companies, an indexed annuity grows based on a formula related to indexes such as the Russell 1000, S&P 100 and S&P 500. The annual spread of an indexed annuity ranges from 1.5% to 5%. This form of annuity is an ideal long-term investment, particularly for retirement.

Indexed AnnuitiesPHOTO BY FLICKR.COM/AMAGILL

Indexed Annuities - Advantages and Disadvantages

People who own an indexed annuity cannot use their premiums for tax deductions. Additional fees may also apply if the recipient withdraws from an annuity before income payments are officially disseminated. Another risk in indexed annuities is potential losses if an index-linked interest is not credited, or if the insurance company does not fully guarantee the principle. On the upside, rising stock markets that have market index-linked interest rates can benefit those with this kind of annuity. Long tax deferrals applicable to indexed annuities allow recipients to accumulate significantly more money in the future. In many American states, this form of annuity cannot be claimed by a creditor.

Equity Index Annuity - Call Options

An indexed annuity can be linked to profitable indexes through five popular options, namely insurance versus Wall Street, Point-to-Point, Monthly Average, Monthly Point-to-Point, and finally, the performance triggered option. They are counterparts of Wall Street, European options, Asian options, Cliquet and Binary options, respectively. In the Monthly Average option, the equity index annuity may allow interest credits every year in case of a gain. In the point-to-point option, the cost can be minimized using the adjustment method in order to become affordable. These options are imperative in calculating and linking equity index annuity to S&P 500, Dow Jones and comparable indexes.

Fixed Index Annuities - Other Terms

Participation rate is a level indicated by index annuity issuers to inform owners of the annuity when they will be in the market. Presented in percentage, participation rates help insurers and owners of fixed index annuities compare the annuity’s maturity with the performance of the index. Despite the participation rate, insurance companies will set “floors” to prevent the annuity owner from earning a certain amount of interest especially when the indexes depreciate and losses are incurred. To ensure that annuity’s value will appear as if it only goes up, insurers take advantage of spreads, which is the difference between the amount of interest earned and the interest credited.

Written by Katherine Murphy

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