A fixed-indexed annuity (also known as a hybrid or equity indexed annuity) is 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 stock market index (such as the S&P 500®), reduced by certain expenses and formulas.
At the time the contract is opened, a term is chosen, which is the number of years until the principal is guaranteed and the surrender period is finished. In a robust stock market, you will not achieve the actual performance of the index due to the formulas, spreads, participation rates, and caps applied to fixed-indexed annuities, as well as because of the absence of dividends (see below). However, in a down market you won’t ever lose principal (provided the underlying insurance company stays solvent, and to date no insurance company has ever failed to pay out on a fixed annuity). Many investors find that fixed-indexed annuity returns more closely approximate CDs, traditional fixed annuities, or high grade bonds, but with the potential for a small hedge against inflation in an up market.
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