Indexed annuity - Financial definition
Concise definition of the term indexed annuity
An indexed annuity is a type of annuity contract that earns interest based on a specified equity-based index, such as the S&P 500, providing a minimum guaranteed return while allowing for potential upside linked to market performance. It combines features of fixed and variable annuities, offering a balance between risk and return.
Comprehensive definition of the term indexed annuity
Indexed annuities, also known as equity-indexed annuities or fixed-indexed annuities, are popular financial products that offer the security of principal protection and a potential for higher returns linked to an equity index. These annuities credit interest to the investor’s account based on the performance of a specified index, typically subject to a cap rate, participation rate, or spread. For instance, if the S&P 500 index increases by 10% in a year, an indexed annuity might credit the investor's account with 6% interest if there is a cap rate of 6%.
Conversely, if the index performs poorly, the annuity still provides a minimum guaranteed return, safeguarding the principal against market downturns. This blend of stability and growth potential makes indexed annuities appealing to conservative investors seeking better returns than traditional fixed annuities but with less risk than variable annuities. Additionally, indexed annuities often come with various features such as death benefits, guaranteed income riders, and tax-deferred growth, enhancing their attractiveness for retirement planning. However, they can also include complex fee structures and surrender charges, which investors should carefully consider before purchasing.