Indexed annuities, which are also commonly referred to as equity indexed annuities, are popular amongst consumers who want to limit their potential losses in the stock market. The growth and yields of your indexed annuities are linked to the performance of the stock market indexes, like the S&P 500. If the index grows favorably, then you can encounter great profits; however, if the index should decline unfavorably, then you are protected against catastrophic losses. Indexed annuities are attractive to many individuals, because they allow you to play the stock market without losing your principle.

Indexed annuities are referred to as single premium contract, which means that an individual purchases their annuity contract with a single lump sum payment. If you wish to invest further monies, then you will most likely have to purchase an additional contract. This type of investment strategy is considered low risk, since one cannot lose their principle. Although an indexed annuity’s annual return rate will be dependent upon the market’s performance, your indexed annuity is guaranteed to grow at a baseline rate of 1-3%. The only possibility that you will have of losing money is if you become insolvent or if your investments exceed your state’s annuity insurance limit.

In general, indexed annuities tend to perform favorably each year. In a good year, the annuity can grow as much as 10-15%. On average, over a period of 10-20 years, the averaged indexed annuity will yield a return of 7-10% return. When it comes to purchasing a fixed annuity, they are available in several different combination’s of fixed and variable contracts, which can make comparison shopping between the different providers of annuities difficult. When you are choosing an annuity, it is ideal for you to consider four different points before purchasing: participation rate, cap rate, minimum rate, and administration fees.

When you purchase an indexed annuity, you will be able to purchase short, medium, or long term annuity contracts, which can range from one year to ten years. There are some annuity providers who will also allow you to have the option of purchasing additional life insurance policies that will offer benefits to your family members upon your death. Indexed annuities will also allow you to bestow tax free gifts upon others. You will be allowed to gift up to $10,000.00 per individual, per year without paying taxes upon it. Furthermore, you will be allowed to invest as much money as you would like in your indexed annuity without undue pressure from the IRS.

While indexed annuities offer you the ability to obtain fabulous rates of return, there are also some pitfalls and disadvantages associated with these annuities. For example, some of the most common disadvantages associated with indexed annuities include early withdrawal fees, administration fees, vesting schedules, and the single premium contract natures. There are numerous individuals who also encounter difficulties with indexed annuities, because they fail to read the fine print of their contracts. It can be difficult for an individual to navigate the indexed annuity if they do educate themselves regarding its finer points. If by chance, you decide to go with a fixed annuity over an indexed annuity, don’t forget to lock in your fixed annuity rates early, as rates tend to fluctuate often.

The reduced liquidity of indexed annuities makes them particularly ideal for those who will be retiring soon. Those who are seeking to capitalize on market growth without risking their principle will also do well by investing in indexed annuities. If you are looking ahead to your future 5+ years down the road, then these annuities will be the ideal type of investment for you. However, it should be noted that even though your principle is guaranteed, income obtained through indexed annuities is variable, and it can be hard to calculate.

Steven Hart has been a financial insurance and annuity writer for over 5 years and has written on many different finance related topics. He specializes in Life Insurance and Annuities, as he is also a licensed agent to sell these products. He has been featured on many life insurance blogs and websites as well as in many articles. To find out more about annuities, check out his popular website!

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