Indexed Annuity

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Market Index

    An aggregate value produced by combining several stocks or other ...
  2. Fixed Annuity

    An insurance contract in which the insurance company makes fixed ...
  3. Deferred Annuity

    A type of annuity contract that delays payments of income, installments ...
  4. Variable Annuity

    An insurance contract in which, at the end of the accumulation ...
  5. Payout Phase

    The phase in an annuity during which payments are made to the ...
  6. Annuity

    A financial product sold by financial institutions that is designed ...
Related Articles
  1. Savings

    Are Equity-Indexed Annuities Right For You?

    Equity-indexed annuities can be confusing to understand, but for conservative investors, they can be valuable savings plans.
  2. Home & Auto

    Watch Your Back In The Annuity Game

    Find out how to get the upper hand when dealing with this payout challenge.
  3. Insurance

    Indexed Universal Life: Cash, Flexibility And Safety

    IULs boast the security of fixed universal life policies and the interest-earning potential of variable policies.
  4. Professionals

    A Close Look At Certified Senior Designations

    We examine the validity of senior financial designations and whether they are worth pursuing.
  5. Options & Futures

    Deciphering Deferred Annuity Designations

    Tax deferred annuities can be complex arrangements. Discover some of the situations that arise when an owner or annuitant dies and how to reduce tax liability if you're the beneficiary.
  6. Home & Auto

    An Overview Of Annuities

    These contracts provide a guaranteed income stream. Learn how they work and their benefits.
  7. Retirement

    Annuities: How To Find The Right One For You

    Fixed, variable and indexed annuities offer different features. Find out which one fits your needs.
  8. Home & Auto

    Subaccounts: As Good Their Clone Funds?

    Variable annuity subaccounts are virtual clones of mutual funds but they have their own CUSIP number and their historical performances are tracked separately.
  9. Options & Futures

    How Your Annuity Company Determines Renewal Rates

    Find the firm that's right for you by uncovering how it makes its investment choices.
  10. Retirement

    The Cost Of Variable Annuity Guarantees

    These products tempt investors with some impressive benefits - but they come at a price.

You May Also Like

Hot Definitions
  1. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  2. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  3. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  4. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  5. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
  6. Key Performance Indicators - KPI

    A set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their ...
Trading Center