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Annuities are designed to be a longer term
savings vehicle issued by an insurance company; your
principal earns tax-deferred interest, which increases its
compound-interest earning power. After a certain
period, you select, from a series of choices, how you wish
to receive your payments, and for how long.
An INDEXED
ANNUITY is a type of FIXED annuity, because the principal
and the accumulated interest each year is still guaranteed
by the insurance company's cash reserves. Life
insurance companies are required to keep sufficient cash
reserves that can pay off annuity contracts and life
insurance claims. Additionally, contracts are also
backed up by reinsurance companies and state government
insurance guarantee provisions.
Indexed
Annuities are named that because they provide the
opportunity for the contract owner to accumulate interest
based on a specific index, such as the
S&P 500 or Dow Jones. There is also a fixed rate
category with a guaranteed rate of return. These
indices are used to determine how much is credited to your
account value each year.
The
insurance company credits the gain from the index you have
chosen for the year and adds it to the principal at the end
of each yearly contract anniversary, up to certain
limitations.
A major
benefit of the Indexed Annuity, which is a "Fixed"
annuity, as opposed to the Variable Annuity, is that if the
index on which your contract is based went DOWN in that
contract year, your account balance doesn't fall--it stays
even. There is often even a minimum guaranteed growth
of 1% each year of the underlying contract value,
regardless.
But if you
are in a market that loses 10% one year, 20% the next, and
then gains 10% the third year, and you have an indexed
annuity, then you are ahead 10% at the end of the third
year. The person in the market is still down by almost
21% on the initial investment.
It's not
magic--it's just not having to recover from a negative
position. If this makes sense to you or you want more
details, call us.
We can help. |
