What are fixed index annuity rates dependent on?


To understand how fixed index annuity rates are determined, one needs to know the essence of this annuity type.

Fixed index annuities, also referred to as equity-index annuities, combine the best features of both fixed and variable annuities. The hybrid nature of fixed index annuities has turned them into a very desirable product among annuity buyers.

Like variable annuities, fixed index annuities allow you to participate in the stock market by crediting interest according to the changes in the stock or the equity index which the value of the annuity is tied to. Of course, it is impossible to predict changes in the market indices, which would make fixed index annuities a very risky investment, were it not for its security features.

Because it guarantees a minimum rate of return and puts a cap on the maximum return, a fixed index annuity investor stands a minimal risk of loss.

Determining Fixed Index Annuity Rates

Fixed index annuities have four basic elements which affect their rates:

  • The participation rate is periodically determined by the insurer. It constantly changes according to the increase in the stock index which is credited to the annuity.

    The fixed index annuity participation rate typically ranges between 30 and 100 percent of the index gain. If for example, the stock index rises 5 percent during a certain period, and the participation rate determined by the insurer for that period is 50 percent, the index-bound interest rate credited to the annuity will be 2.5 percent (50% X 5% = 2.5%).

  • Some fixed index annuities, but not all, have a maximum cap rate which provides an upper limit to the interest rate that can be credited to an annuity.
  • Fixed index annuities purchased for a period of at least one year have a guaranteed minimum value, provided that they are held to term. This is a very favorable characteristic as it offers guaranteed protection against the loss of principal.
  • Fixed index annuities are credited excess interest rate through several indexing methods, the most common of which is the so-called ratchet method. This approach calculates the interest gains according to the yearly index change.
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