## Fixed-Indexed Annuities

Fixed-indexed or equity-indexed annuities combine the features of indexed annuities and variable annuities through a guaranteed minimum return plus a chance at higher gains from a benchmark index.

### Features

Fixed-indexed annuities can be considered a type of fixed annuity, with the main difference being in the way earnings are computed. A fixed-indexed annuity grows at the greater of:

- A guaranteed annual minimum rate (usually 2% to 3%)
- The return from a benchmark stock market index (e.g. the S&P 500)

Due to this structure, when the stock market rises, you get better returns; but when the stock market falls, your account is protected through the guaranteed minimum interest. Moreover, you are guaranteed to receive at least 100% of your principal investment less withdrawals once the contract’s minimum period of ownership is reached.

There are three important rates to take note of in a fixed-indexed annuity:

**Participation rate**: Also known as the index rate, this is the percentage of the index increase that the annuity will grow. For example, the S&P 500 increases by 20% and the annuity’s participation rate is 80%, the annuity will be credited with 16%.**Floor rate**: This is the guaranteed minimum interest rate of the contract.**Cap rate**: This is the maximum percentage increase allowed annually. For example, using the same numbers above with a 10% cap rate, the contract will be limited to a 10% increase instead of 16%. Annuities that do not have a cap rate usually have lower participation rates.

### Pros

Because of how a fixed-indexed annuity grows, you can get higher returns than a fixed annuity when the index climbs. There’s also less risk than a variable annuity when the index is on a downturn.

Some fixed-indexed annuities offer optional death benefits and/or guaranteed lifetime withdrawal benefit (GLWB). With a death benefit, your beneficiary receives the annuity’s remaining balance if you die before payments begin. With a GLWB, the principal will be compounded for 10 years minimum at 6% to 8%.

### Cons

Fixed-indexed annuities are complicated products and as such are difficult for investors to understand and compare. Additionally, surrender charges can be as high as 20% and can last for 15 or more years.

The chance of getting higher returns can also be less than expectations, due to the participation rate and cap rate. Also, note that dividends are not usually included in calculating total returns. Dividends can make up as much as 40% of the total return of the S&P 500.

### Recommendations

Getting a fixed-indexed annuity can be great if you want to protect your investment while taking advantage of stock market gains. However, take extra care reading the terms and understanding how this annuity works before purchasing.

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