Indexed Annuity


DEFINITION of 'Indexed Annuity'

A special class of annuities that yields returns on your contributions based on a specified equity-based index. These annuities can be purchased from an insurance company, and similar to other types of annuities, the terms and conditions associated with payouts will depend on what is stated in the original annuity contract.

BREAKING DOWN 'Indexed Annuity'

Insurance companies commonly offer a provision of a guaranteed minimum return with indexed annuities, so even if the stock index does poorly, the annuitant will have some of his downside risk of loss limited. However, it also is common for an annuitant's yields to be somewhat lower than expected due to the combination of caps on the maximum amount of interest earned and fee-related deductions.

For example, suppose an indexed annuity is based on the S&P 500, which earns 10% one year. The terms of an indexed annuity state that fees will be 2.5% and that the maximum cap on returns is 9%. In this case, the annuitant would only receive a total of 6.5% (9% - 2.5%) return from his or her annuity.

  1. Annuity

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  3. Market Index

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  5. Payout Phase

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  6. Variable Annuity

    An insurance contract in which, at the end of the accumulation ...
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  1. What is the difference between a fixed and variable annuity?

    For many people, saving for retirement means tucking money away in a diverse range of investments. Because traditional savings ... Read Full Answer >>
  2. How liquid are variable annuities?

    Variable deferred annuities and variable immediate annuities are not considered liquid. Variable deferred annuities carry ... Read Full Answer >>
  3. Do variable annuities have RMDs?

    Variable annuities are not subject to required minimum distributions (RMDs) unless they are held in qualified plans, such ... Read Full Answer >>
  4. Can variable annuities be rolled into an IRA?

    Variable annuities are often found in government or nonprofit employer retirement plans such as 403(b) or 457(b) plans. With ... Read Full Answer >>
  5. How do I calculate the future value of an annuity?

    When planning for retirement, it is important to have a good idea of how much income you can rely on each year. There are ... Read Full Answer >>
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    Whether your variable annuity is protected from creditors depends on the state in which you live. About three-quarters of ... Read Full Answer >>

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