Understanding the Basics

Understanding the Basics

Posted: July 6, 2015 at 3:29 pm by Skip Kelley

A fixed index annuity is a contract between you and an insurance company that may help you reach your long-term financial goals. In exchange for your premium payment, the insurance company provides you income, either starting immediately or at some time in the future.

How a fixed index annuity works

Most fixed index annuities have two phases. First, there’s an accumulation phase, during which you let your money earn interest. This is followed by a distribution or payout phase, during which you receive money from your annuity.

A fixed index annuity also guarantees you will receive at least the minimum guaranteed interest credited to the contract. Remember that all of these guarantees are backed by the claims-paying ability of the issuing company.

With a fixed index annuity, you defer paying taxes on your contract’s interest until you receive money from the contract. Tax-deferred interest means the money in your contract can grow faster.

Your principal and bonus are never subject to market index risk. A downturn in market index(es) cannot reduce your contract values.

Phase one: Accumulation

The accumulation phase begins as soon as you purchase your annuity. Your annuity can earn a fixed rate of interest that is guaranteed by the insurance company or an interest rate based on the growth of an external index.

Phase two: Distribution

The distribution phase of a fixed index annuity begins when you choose to receive income payments. You can always take income payments in the form of scheduled annuitization payments over a period of time, including your lifetime. And many fixed index annuities allow you to take income withdrawals as an alternative to annuitization payments. Either way, you can choose from several different payout options based on your personal needs, including options for guaranteed lifetime income.

You are using an outdated and unsupported browser. Please upgrade to continue.

This version of Microsoft Internet Explorer is over eight years old, does not receive security updates, and is not able to render modern websites. We strongly suggest updating your version of Internet Explorer or using a modern web browser such as Microsoft Edge, Google Chrome, or Mozilla Firefox