Indexed Annuities

Indexed annuities, also known as fixed-indexed annuities (FIAs) or equity-indexed annuities (EIAs), are a type of deferred annuity contract offered by insurance companies. They are designed to provide a balance between the guaranteed returns of traditional fixed annuities and the potential for higher growth offered by variable annuities, all while safeguarding your principal.

Market-linked growth potential: Indexed annuities credit interest based on the performance of a chosen market index, such as the S&P 500, Nasdaq 100, or Russell 2000. This means that when the index performs well, your annuity’s value can increase. However, unlike direct investments in the market, you don’t actually own the underlying securities of the index.

Downside protection: A key feature of indexed annuities is the protection of your principal from market losses. Even if the market index declines, your initial investment is safeguarded. Many indexed annuities also guarantee a minimum interest rate or have a 0% floor, meaning you won’t lose money due to a negative index performance, although you won’t gain interest either.

Indexing methods: Insurance companies use various methods to calculate how much interest is credited to your annuity based on the index’s performance. These methods often include:

1. Participation rates: This percentage determines how much of the index’s gain is credited to your annuity. For example, an 80% participation rate on a 10% index gain would credit 8% to your annuity.
2. Interest caps: Some annuities limit the maximum interest rate you can earn in a given period, regardless of how much the index rises. For instance, a 6% cap means even if the index grows 10%, you’ll only receive 6% credited interest.
3. Spread or margin: A percentage subtracted from the index’s return before crediting interest. If the index gains 8% and the spread is 2%, your annuity will be credited 6%.

Accumulation and payout phases: Like other annuities, indexed annuities have two main phases:

• Accumulation phase: During this time, you make payments (lump sum or series of payments) to the insurance company, and your funds grow based on the selected indexing method.
• Payout phase: When you’re ready to receive income, the insurance company makes periodic payments to you, which can be for a fixed period or for life.

Indexed annuities are generally suitable for long-term, risk-averse investors nearing or in retirement who want a balance of principal protection and potential market-linked growth. They can be a good option for those seeking a guaranteed income stream in retirement without the full volatility of the stock market.

However, it’s crucial to understand the limitations of indexed annuities, including the potential caps on returns, complexity of contracts, and fees, before making a decision. It is always recommended to consult with a qualified financial advisor to determine if an indexed annuity aligns with your specific financial goals and risk tolerance.

Contact Hutchison Insurance Group today to discus your options for Indexed Annuities.