Annuities are contracts that are purchased by investors from insurance companies in exchange for promise of future payment. There are several types of annuities which exist, including variable, fixed, deferred, immediate, and indexed. Indexed annuities, the topic of this post are a type of annuity that grows at the greater of a) an annual, guaranteed minimum rate of return; or b) the return from a specified market index (such as the S&P 500). In a robust market, you will not achieve the actual performance of the index due to how the gains are added to your annuity, however in a down market you won’t ever lose your principal. The fact that principal cannot be lost makes fixed index annuities very popular with conservative investors who want a fixed stream of income that they cannot outlive.
Like other annuities indexed annuities can provide several key benefits to investors including a way to defer taxes and provide income during retirement.
I have included a couple of videos below that do a good job of explaining the basics of annuities and specifically indexed annuities in a way that is easy to understand.
The first video is by The Annuity Think Tank, a free website providing information about annuities. The second link is to a series of three videos by Allianz, an insurance company that sells annuities. The first video provides the basics of annuities, the second one contains information about fixed index annuities, and the third video markets their strength as an annuity provider.
All types of annuities have their pros and cons. If you would like to discuss whether an annuity makes sense for you I’d be happy to talk.