Today's Best Fixed Index Annuities
These are our 3 most popular Fixed Index Annuities (updated Thursday, 2017-02-09). For expert help call 800-872-6684.
The premium you pay to buy a fixed index annuity is not invested in a stock mutual fund or bond fund as is generally true for a variable annuity. Rather your returns depend on the performance of a benchmark index (e.g., S&P 500, Nasdaq, or Dow Jones Industrials). This means that each year on the anniversary date of your annuity, the insurance company will credit gains to your account if the underlying benchmark index increased in value during that year. The amount credited to your annuity will be determined by a cap rate or participation rate as outlined in the contract documents (see below). The good news is that if the underlying stock index experienced a loss in that year (say a 40% drop like in 2008), your fixed annuity account balance will not suffer any loss at all! In years during which the stock market loses, your index annuity simply receives a 0% credit, but no loss.
Q. How does the insurance company determine the amount of interest to credit to my annuity?
A. Fixed index annuities provide total protection against losses in years that the stock market drops. To provide this protection, the insurance company must retain some of the gains in years in which the stock market moves up. So in up years the insurance company credits you with only a portion of the overall market gains. While in bad market years you never lose. The two most common methods for figuring this out are called the “cap rate” method and the “participation rate” method.
A cap rate is the highest percentage gain that the insurance company will credit to your annuity in any period. For example, if your annuity has an annual cap rate of 7% and the underlying benchmark index grows by 10% that year; your annuity will be credited with a maximum of 7%. If the market only grew 4% that year, your annuity would be credited with 4%. You would receive gains up to the maximum percent limited by the cap rate.
A participation rate is the proportion of the gain that the insurance company will credit to your annuity. For example, if your company offers an annual 40% participation rate then in a year when the benchmark index grew 12% your annuity would be credited with 4.8% interest (which is 40% of the 12% stock market gain).
In order to achieve the greatest earning potential, you should seek out annuity contracts which offer the highest cap rates or participation rates.
Q. Which benchmark indices does this annuity offer?
A. Most index annuities benchmark their crediting method to the S&P 500. Some insurance companies also offer annuities indexed to the Dow Jones Industrials, Nasdaq or Euro Stoxx 50.
Q. Are my returns compounded each year or does the company use a simple interest formula?
A. A simple interest calculation would give you credits each year based on the initial premium you paid in the first year. A compound interest rate calculation would give you interest on the initial premium plus interest on the gains which have accrued during all the prior years. The majority of fixed index annuities use the compound interest rate method, which gives you greater earnings over time than a simple interest calculation.
Q. Does this annuity provide a Guaranteed Minimum Accumulation Value?
Some indexed annuities offer a guaranteed minimum accumulation value, which will be applied each year regardless of the benchmark performance over the life of the contract. For example, an index annuity might guarantee 107% of your initial premium, even if the benchmark index decreases year after year throughout your contract. (I.e., 100% of your initial premium plus a guaranteed minimum of 7% interest credits.)
Q. What fees will be charged for surrendering the contract and over what time period?
A. Most fixed index annuity contracts have pre-set, declining surrender fees that range in terms of time horizon (5-20 years). This means that if you make a withdrawal greater than the penalty-free amount (usually 10% annually), then you will be charged a surrender fee.
Q. Can I make penalty-free withdrawals?
A. Most insurance companies permit early withdrawals within certain guidelines that don’t trigger surrender fees. For example, 10% of the contract value may be withdrawn annually without charges being applied. Most contracts also allow you to withdraw Required Minimum Distributions free of surrender fees.
Q. What is my minimum guaranteed surrender value?
A. Many fixed index annuities will have a specified “minimum guaranteed surrender value.” This means that even
if you surrender your policy during the first contract year, you are guaranteed to receive a specified minimum amount. The minimum guaranteed surrender value is generally an amount less than the original premium deposit. For example, the insurance company might guarantee 90% of the initial premium amount plus accumulated interest.
Q. What options do I have for generating income payments from my fixed index annuity?
A. The two methods for generating income payments are “income riders” and “annuitization.”
Adding an income rider to your fixed index annuity will allow you to decide when you would like to begin receiving income payments for life. Generally, your income rider will grow at a rate specified in your contract (currently between 5-10% annually). This rate is often referred to as a “rollup rate.” Important to note is that income riders often come with an annual fee (usually between 0.50 and 1.00% annually).
The term “annuitization” refers to converting your fixed index annuity to an immediate annuity. This opens up a variety of payout options, such as income over a single lifetime, joint lifetime, or for a specified period of years. Many fixed index annuities permit you to annuitize your contract after the first contract year.
Q. What happens to my annuity if I die?
A. Most fixed index annuities offer your beneficiaries the option of withdrawing the full account value (death benefit) without any surrender fees. Additionally, some policies will allow beneficiaries to annuitize their lump sum. In other words, they can convert their lump sum into an immediate annuity. Before purchasing a fixed index annuity, be sure to explore the annuity’s death benefit features.
Q. Will I be charged any fees for this annuity?
A. Most fixed index annuities come free of any fees. However, if you add certain income or withdrawal riders an annual fee will be deducted from your interest credits. Be sure to review the expenses and fees described in the contract.
Q. How financially secure is the insurance company?
A. A company’s financial strength can be an indicator of its future reliability. Be sure to review each insurance company’s financial ratings (A.M. Best, S&P, Moody’s).
As you compare and contrast illustrations offered by various insurance companies, take into consideration each of the areas listed above when making your final decision.
Understanding contract terms as well as each annuity's advantages and disadvantages will enable you to make the best decision for your financial situation.
A question we often hear is, “What is the difference between a variable annuity and a fixed index annuity?” Simply put, there is a huge difference between the two, and understanding those differences is the key to understanding why the annuity products on this page may be a better choice for you in your financial situation.
The gains you may or may not accrue in a variable annuity are based on the performance of the underlying sub-accounts into which you allocated your premium. Sub-accounts are similar to mutual funds and usually reflect an investment strategy ranging from conservative to aggressive. It is important to understand that it is possible to lose your money in a variable annuity. Yes, your premium is at risk. If someone tells you that it is impossible to lose your money with a variable annuity they are misleading you.
Fixed index annuities give you the opportunity to earn returns based on the performance of a benchmark stock index (e.g., S&P 500) without the risk of ever losing money in a year when the stock market declines. A fixed index annuity is governed by a rate floor and a rate cap making them a safer alternative to a variable annuity.
The index annuity rate floor ensures that no matter how poorly a stock index performs in a given year, you will not see a negative return. The rate cap allows insurance companies to offer this type of guarantee. The annual return on your annuity is capped, usually between 3 and 7 percent a year. The caps can be adjusted by the issuing insurance company each year.
Currently, a number of index annuity companies in our list (see above) offer you a premium bonus of up to 10 percent, when you sign up. This bonus immediately increases your initial account value. Index annuities charge surrender fees if you withdrawal the money early.
Need help with fixed index annuities? Before deciding which index annuity is right for you be sure to speak with one of our friendly annuity experts. Call tollfree 800-872-6684. We'll help you compare rates and income payout options as well as the strength of the issuing insurance company.