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Fixed Indexed Annuity Combines Fixed And Variable Features

A feature of fixed annuity contracts that many investors felt was missing was market participation. Even though variable annuities allow the investor the ability to tie their accounts to individual stocks and other market based products, variable annuities are anything but appropriate for most. For one thing, variable annuities have the ability to completely lose their value during market downturns. Couple this with notorious commission rates and unscrupulous sales pitches, and the variable annuity quickly loses its appeal. In answer to this need from the investing community, the insurance companies created a product that takes the best of both the fixed annuity world and the variable world. This product is called a fixed indexed annuity.

Fixed indexed annuities are fixed annuity contracts that participate in the market indexes. Most contracts tie their rates to the S&P 500, although other market indexes are also used. Rather than subject the contract to risk of loss, they are often given a guaranteed minimum interest rate. In market downturns, your interest rate may be at 0%, but your principal is guaranteed to not fall. Do the math on what type of interest rate you would require to restore your principal if you lost 50% of your account during a downturn. You’ll quickly see the advantage of this protection of principal.

These indexed annuities function much more similar to a fixed annuity than a variable annuity. They participate by giving account bonuses or interest rate adjustments based on the performance of the market. Although your account is tied to a market index, you will not necessarily participate in the full growth of the index. The insurance companies have built in various crediting options to help them counter the risk they take on during market downswings. Your actual participation in index growth will be limited by caps, participation rates, and spreads. How your account is credited will depend on the structure of the individual annuity and can fluctuate greatly between companies and even products within each company. As with any other financial product on the market, be sure to do your research before purchasing. Know your crediting options, and understand how your annuity is supposed to work.

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