Fixed indexed annuities

How index-linked interest works

A fixed indexed annuity credits interest based on the movement of an index over a crediting period. The contract is not a direct investment in the index, and the owner does not own the underlying securities. A negative index result generally produces no index-linked interest for that crediting period, subject to the contract’s crediting method.

Withdrawals, surrender charges, market value adjustments, rider charges, and other contract provisions can still reduce contract value.

Guarantees apply only as described in the issued contract and depend on the claims-paying ability of the issuing insurer. Annuities are not bank deposits, are not FDIC or NCUA insured, and are not guaranteed by any federal government agency.

What limits the interest credited

• Index dividends are generally excluded from the index calculation used for crediting.
• Caps limit the interest credited in a period; spreads are deducted from index movement; participation rates credit only a stated portion of it.
• Crediting methods differ — annual point-to-point, monthly averaging, and others produce different results from the same index path.
• Those terms may change over time according to the contract.
• Optional riders, such as income riders, can carry charges that reduce value.
• Liquidity is limited during the surrender period.

Questions worth asking

• Which crediting method applies, and how is it calculated?
• What are the current caps, spreads, and participation rates — and can they change?
• What does each optional rider cost, and what does it actually guarantee?
• What is the surrender charge schedule, and is there a market value adjustment?

Further reading

• Understand participation rates
• Understand surrender periods

Skyway is an independent insurance agency. We provide insurance education and insurance-product guidance. We do not provide legal, tax, accounting, or investment advice. Consult the appropriate licensed professional for advice in those areas.