Indexed Annuity

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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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RELATED FAQS
  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. What are the best ways to sell an annuity?

    The best ways to sell an annuity are to locate buyers from insurance agents or companies that specialize in connecting buyers ... Read Full Answer >>
  3. How are non-qualified variable annuities taxed?

    Non-qualified variable annuities are tax-deferred investment vehicles with a unique tax structure. After-tax money is deposited ... Read Full Answer >>
  4. Can a variable annuity be rolled into an IRA?

    You can roll qualified variable annuities, such as other qualified retirement plan accounts, into a traditional IRA. Non-qualified ... Read Full Answer >>
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    Variable annuities are insurance contracts that provide tax-deferred growth of assets that can later generate a guaranteed ... Read Full Answer >>
  6. For what types of financial instruments would I want to calculate the present value ...

    Because the present value of an annuity formula relies on a consistent interest rate and identical payments for a set period ... Read Full Answer >>

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