Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
A fixed annuity is a contract issued by an insurance company. In that contract the owner is not really required to do anything except make at least one deposit. The insurance company guarantees everything else.
The insurance company will accumulate money in the annuity, if it is deferred, and guarantees that the money will receive a guaranteed amount of interest each year. Currently there are a great number of fixed annuities in force with interest rates far in excess of the interest rates offered to new customers. The company guarantees those rates for as long as the contract is in force.
These guarantees continue into the annuitization phase when the company will return to the annuitant an amount of money guaranteed by a formula inside the contract and will make those payments until the annuitant passes away, or even beyond in many cases. Everything is guaranteed by the company.
In contrast a variable annuity has few guarantees. The owner can choose into which funds the deposits will be invested and can often select to maintain that control even when the policy is annuitizing. This results in uneven results both during accumulation and annuitization. Sometimes that works for the benefit of the annuitant, but it could work against the annuitant if the underlying securities fail to perform. Incidentally it takes someone with a variable annuity license to sell this product.
An indexed annuity is somewhere in between these extremes. The money that accumulates in the contract usually has a guaranteed minimum level of interest. This is often “0” which can be a great deal better than a significant minus number. The amount of interest credited to the account is linked by the insurance company to one of the leading indexes. The Dow Jones Average is one index. The Standard and Poor’s index is another. The company uses these indexes to set the interest that will be credited to the account.
Normally the index annuity does not receive the exact interest rate indicated by the index. There will either be a ceiling above which the insurance company will not go or the interest rate is modified by a factor. For example if the S&P went up 10%, depending upon the contract, the indexed annuity might pay 7% or 70% of the index according to the contract. However it might pay 5% because there is a 5% ceiling on the interest the company will pay.
The index annuity is attractive because it allows the annuitant to participate in the results of the market without ever actually holding shares of stock. It has “upside potential” but it doesn’t have any “downside risk.”
During a rising market we would expect the index annuity to do quite well, However, it might not do as well as the Variable Annuity. During a down market it will not lose money, however a Variable Annuity can lose money. At the same time the Fixed Annuity will continue to earn its guaranteed rate of interest and may even raise its interest rate from time to time, but everything is guaranteed.
That is a great question. And the answer is no sir, they are very different. With a fixed annuity, you are guaranteed a rate of interest that will be paid on your annuity. On the indexed one, the interest rate will vary, based upon the performance of the index that the rate is tied to. That interest rate will also be influenced by whatever cap rates, participation rates, and crediting strategy is chosen. With the fixed annuity, you have the certainty of knowing the end result, with the indexed product, it's anybody's guess. I hope that helps, thanks for asking!
Agent Owner, Gilmore Insurance Services, Marysville, Washington State
Is an indexed annuity a fixed annuity? No, not usually unless provisions exist within the indexed annuity to mimic a fixed annuity. With a fixed annuity you're provided a set interest rate for the year from the insurance company. It is up to the company to come through as they've committed themselves for that outcome. An index annuity on the other hand, has potential for a variety of returns established by the policy owner. A return could be as high as 10% for a year or zero percentage based on how the individual creates the policy.
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The insurance company will accumulate money in the annuity, if it is deferred, and guarantees that the money will receive a guaranteed amount of interest each year. Currently there are a great number of fixed annuities in force with interest rates far in excess of the interest rates offered to new customers. The company guarantees those rates for as long as the contract is in force.
These guarantees continue into the annuitization phase when the company will return to the annuitant an amount of money guaranteed by a formula inside the contract and will make those payments until the annuitant passes away, or even beyond in many cases. Everything is guaranteed by the company.
In contrast a variable annuity has few guarantees. The owner can choose into which funds the deposits will be invested and can often select to maintain that control even when the policy is annuitizing. This results in uneven results both during accumulation and annuitization. Sometimes that works for the benefit of the annuitant, but it could work against the annuitant if the underlying securities fail to perform. Incidentally it takes someone with a variable annuity license to sell this product.
An indexed annuity is somewhere in between these extremes. The money that accumulates in the contract usually has a guaranteed minimum level of interest. This is often “0” which can be a great deal better than a significant minus number. The amount of interest credited to the account is linked by the insurance company to one of the leading indexes. The Dow Jones Average is one index. The Standard and Poor’s index is another. The company uses these indexes to set the interest that will be credited to the account.
Normally the index annuity does not receive the exact interest rate indicated by the index. There will either be a ceiling above which the insurance company will not go or the interest rate is modified by a factor. For example if the S&P went up 10%, depending upon the contract, the indexed annuity might pay 7% or 70% of the index according to the contract. However it might pay 5% because there is a 5% ceiling on the interest the company will pay.
The index annuity is attractive because it allows the annuitant to participate in the results of the market without ever actually holding shares of stock. It has “upside potential” but it doesn’t have any “downside risk.”
During a rising market we would expect the index annuity to do quite well, However, it might not do as well as the Variable Annuity. During a down market it will not lose money, however a Variable Annuity can lose money. At the same time the Fixed Annuity will continue to earn its guaranteed rate of interest and may even raise its interest rate from time to time, but everything is guaranteed.