Fixed Indexed Annuity Rates and Quotes
Fixed Indexed Annuities are a combination of a Fixed Annuity and Equity Index Annuities. Like the name implies, inside of one contract there are two accounts or two baskets. There is a Fixed Account that earns a set interest rate known as the fixed account rate. The Index Account is an account that allows you the upside potential of stock market indexes without the downside of losses that market incurs. When the fixed account realizes gains, they are locked in an cannot go down, unlike many mutual funds or stocks.
Fixed Indexed Annuity Contract Features
The Fixed Account
The fixed account of a Fixed Indexed Annuity is an account within the annuity that earns a set predetermined interest rate stated by the insurance contract. Most carriers will give a set rate of 2%. It is important to remember that your account will credit annually and any premiums deposited through the year will sometimes automatically be deposited into the fixed account until annual index allocation. Some carriers have minimum guaranteed interest rates for fixed accounts and some have renewal provisions so the fixed account will change from year to year. Some carriers will likely keep them the same or provide a small increase.
The Index Account
Indexed annuities credit interest based on the movement of the stock market index to which the annuity is linked. A market index tracks the performance of a group of stocks representing a specific market segment or the entire stock market. The S&P 500 is the index most commonly used for this purpose. Other indexes, may be used, such as the Dow Jones Industrial Average, NASDAQ 100 or Russell 2000. It is important to understand that when you buy an indexed annuity, you are purchasing an insurance contract and not shares of any stock or index.
An indexed annuity earns a minimum rate of interest and then offers the potential for excess interest earnings based on the performance of the index to which the annuity is linked. The indexing method is the approach used to measure the amount of change in the index and, as a result, has a direct impact on the potential growth of an indexed annuity. When choosing Indexing methods like annual point to point, monthly point to point please think about how long you plan to invest and when you will be starting your income stream. Some methods are more aggressive and some less.
The participation rate determines how much of the increase in the index will be credited to the indexed annuity. The participation rate is usually less than 100%. For example, if the S&P 500 increases by 10% and the participation rate is 80%, the indexed annuity would be credited with 8%. The insurance company may have the right to change the participation rate from year to year or when the annuity is renewed for a new term. Depending on the carrier, renewal rates are usually slightly higher depending on the contract and company.
Margin/Spread/Administrative Fee/Rider costs
Some indexed annuities subtract a specific percentage from the calculated change in the index before crediting interest to the contract. This “margin,” “spread” or “administrative fee,” which may be charged instead of, or in addition to, a participation rate, is subtracted only if the change in the index produces a positive interest rate. Income riders are not free, there is a cost and usually range from .40% up to .95% of the account value each year. Some riders have guarantees regarding the cost and will not exceed a stated amount at contract issue.
Fixed Indexed Annuity Term
This is the period over which index-linked interest is calculated and/or the length of time during which withdrawals or surrenders are subject to a charge. Some contacts are 6 years and some can stretch out to as long as 14 years, so understand the term you are looking for.
Index Cap Rate
Indexed annuities put a cap or maximum rate on the index linked interest that will be credited to the annuity. If the market index chosen in asset allocation increases 12% and the annuity has a 9% cap rate on the specified index only, then 9% will be credited to that index account within the annuity.
Index Floor Rate
At contract issue, and through asset allocation and you choosing the different index options, the rate sheet will state the guaranteed floor rate. This is the minimum guaranteed interest that will be credited to the annuity. This guarantee is based on the claims-paying ability of the issuing insurance company.
An indexing option to chose from like daily averaging. Monthly Averaging is the average of the changes in the index’s value rather than the actual value of the index on a specified date over the course of the months in the year.
Fixed Accounts during the course of the year will credit the fixed account interest rate which compounds yearly. Indexed Accounts credit interest depending on your choices and asset allocation. Meaning that index-linked interest that has already been credited to the contract during the term also earns interest in the future. Both accounts will incur compounding on an annual rate, while income rider accounts compound annually and are linked to the overall account.
Vesting and Surrender Charges
In most fixed indexed annuities, none or only part of the index linked interest is credited to the contract if the annuity is surrendered before the end of the term. The combination of these policy features found in any particular indexed annuity will make a difference in the amount of money your annuity investment will earn and in the amount of money you will receive if you surrender the annuity early. As a result, before you purchase an indexed annuity, it is important that you fully understand the various features in the contract you are considering.
Fixed Indexed Annuity Bonus and Recapture
Some Fixed Indexed Annuities have Bonus provisions on all deposits made within the first 5-7 years of their contracts. It is important to remember that Annuities with Bonuses usually have lower cap rates and participation rates than non bonus annuities. However receiving a 10% bonus on funds you already have is one way to help increase your overall contract value. If however, you surrender the contract prior to term, there are bonus recapture provisions that take back the bonus or percentage of it.