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Indexed annuities: a share of the upside, a floor on the downside

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A fixed indexed annuity credits interest based on how a market index, such as the S&P 500, performs. When the index rises, you receive part of the gain, up to limits the insurer sets. When it falls, the credit for that period is zero rather than a loss.

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Picture it year by year

Example: index changes versus credited interest with a cap and a zero floorcap (example)0Year 1Year 2Year 3Year 4Year 5Year 6Index changeInterest credited to the contractExample: index changes versus credited interest with a cap and a zero floorcap (example)0Yr 1Yr 2Yr 3Yr 4Yr 5Yr 6Index changeInterest credited to the contract
Illustration only, not a projection. In good years the contract is credited part of the index gain, up to a cap or participation rate the insurer sets. In down years the credit is zero instead of a loss. Fees, surrender charges and withdrawals can still reduce the value.

The pieces of an indexed annuity

How the limits work, with simple numbers

Example of how a cap, a participation rate and a floor change the credited interestIndex rises 12%The starting pointfor this example.With an 8% capCredited: 8%(the cap is the mostyou can be credited)50% participationCredited: 6%(half of theindex gain)Index falls 10%Credited: 0%(the floor keeps itfrom going negative)Example of how a cap, a participation rate and a floor change the credited interestIndex rises 12%The starting pointfor this example.With an 8% capCredited: 8%(the cap is the mostyou can be credited)50% participationCredited: 6%(half of theindex gain)Index falls 10%Credited: 0%(the floor keeps itfrom going negative)
Made-up numbers to show the idea, not rates any insurer offers. A cap limits the credit to a set amount, a participation rate gives you a share of the gain, and the floor means a falling index is credited as zero. Each contract uses its own method and rates, which can change at renewal.

Is it a fit?

Indexed annuities can suit someone who wants more growth potential than a fixed annuity without exposing savings to market losses, and who can leave the money alone through the surrender period. They are complex, so Janie walks through the actual contract and its disclosure document with you, and California's best-interest rules require her to understand your situation before recommending one.

Questions about indexed annuities

Am I invested in the stock market?

No. Your money is not invested in the index or in stocks. The index is only used to calculate how much interest the insurer credits to your contract.

What is a cap or participation rate?

They are the limits on how much of an index gain you receive. A cap is the most that can be credited for a period; a participation rate is the share of the gain you get. The insurer sets them and can usually change them at renewal within the contract's limits.

Can the value go down?

With a zero floor, index losses are not subtracted. The value can still drop from withdrawals, surrender charges, or fees for optional riders.

What is an income rider?

An optional feature, usually for an added fee, that can provide lifetime withdrawals. Rider values are used to calculate income and are often not cash you can take as a lump sum.

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