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.

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  5. Variable Annuity

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  6. Payout Phase

    The phase in an annuity during which payments are made to the ...
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  1. What is the difference between a fixed and variable annuity?

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  3. Can I borrow from my annuity to put a down payment on a house?

    You can borrow from your annuity to put a down payment on a house, but be prepared to pay an assortment of fees and penalties. ... Read Full Answer >>
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