Indexed annuity

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Indexed Annuity

An annuity with an interest rate linked to the performance of some index. Most annuities pay the interest rate stated in the contract, but an indexed annuity pays a minimum interest rate (which may be 0%, but never lower), with the possibility of a higher rate depending on the performance of the relevant index. Each plan uses a different methodology in determining how the higher interest rate is calculated. Common features in its calculation include a participation rate, which determines how much of the annuity is linked to the index, and the rate cap, which sets a maximum interest rate on some plans. Many index annuities use the S&P 500 as their benchmark.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

Indexed annuity.

An indexed annuity is a deferred annuity whose return is tied to the performance of a particular equity market index.

Your investment principal is usually protected against severe market downturns, in that you may have an annual return of 0% but not less than 0%.

However, earnings are generally capped at a fixed percentage, so any index gains that are above the cap are not reflected in your annual return.

Indexed annuity contracts generally require you to commit your assets for a particular term, such as 5, 10, or 15 years. Some but not all contracts limit your participation rate, which means that only a percentage of your premium has a potential to earn a rate higher than a guaranteed rate.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
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