With a volatile stock market and painfully low-interest rates in the economy these days, many people – both investors and retirees – are turning to the fixed indexed annuity. One reason for this is because these financial vehicles can offer higher growth than other “safe money” investments, while at the same time providing protection of principal – even if the stock market completely tanks.

But before you rush out and commit to the first fixed indexed annuity (FIA) that you find, it is important to have a good understanding of how the return is determined on these financial vehicles so that you know what you can – and can’t – anticipate.

Determining Your Fixed Indexed Annuity’s Return

With a fixed indexed annuity, you can typically choose one or more underlying indexes to tie the return to. There will also usually be one or more “crediting methods” that are used to track the changes in the underlying index(es).

The fixed indexed annuity’s crediting methods may include:

  • Cap – A cap is a pre-set maximum on how much the annuity can earn during a given time frame. As an example, if the annuity has a cap of 4%, and the underlying index returns 7% for the time period (such as a contract year), then the account will be given a return of 4%. Although this upside growth limitation might not seem fair, it comes with a nice tradeoff in that, if the underlying index(es) performs poorly, there is no loss to either the principal or any of the previous gains. Rather, the contract value is locked in.
  • Participation Rate – Another FIA crediting method is the participation rate. This works on the premise of how much of the underlying index’s return will be used when computing the return on the annuity. For instance, if a fixed indexed annuity has a participation rate of 80%, and the underlying index generates a 6% return in a given time period, then the return that is credited to the annuity will be 4.8%. (That is because 80% of 6% is 4.8%). It is important to note that a combination of crediting methods may be used. So, if the annuity also imposes a 4% cap, then the return would be 4% for that time period.
  • Spread – With some fixed indexed annuities, the return is based upon subtracting a stated percentage from the gain that is generated by the underlying index(es). So, for instance, if there is a spread of 5% on the annuity, and the underlying index(es) attains a return of 9%, then the return for that contract period on the annuity will be 4%. (This is because 9% minus 5% equals 4%).

Are You a Good Candidate for a Fixed Indexed Annuity?

Although there can be numerous “moving parts” to be mindful of with fixed indexed annuities, these financial vehicles can provide you with a number of nice benefits, both before and after you retire.

Just some of these can include:

  • Tax-deferred growth
  • Opportunity for a higher return than a regular fixed annuity
  • Protection of both principal and previous gains in any type of market environment
  • Income – either for a set time period or even for the remainder of your lifetime

Other benefits that you could find on a fixed indexed annuity are:

  • Death benefit
  • Penalty-free withdrawals in the event of a terminal illness diagnosis
  • Penalty-free withdrawals if you require long-term care services

How to Choose the Right Fixed Indexed Annuity for Your Needs

Because all fixed indexed annuities are not exactly the same, it is recommended that you discuss your particular short and long-term objectives with an annuity specialist before you commit to purchasing one.

At Annuity Gator, we can educate you on exactly how these financial vehicles work so that you know what you can expect from it, and so that you are better able to narrow down which annuity is right for you.

So, if you have any questions regarding annuities – or, if you are ready to move forward with learning more about how fixed indexed annuities work – feel free to contact us by phone at (888) 440-2468 or via email by going to our secure online contact form. We look forward to hearing from you.

Understanding crediting methods on fixed indexed annuities