What is an indexed annuity? How do indexed annuities work? An indexed annuity is an annuity that pays interest based on the performance of a market index like the S&P 500. If you need immediate cash, you can probably sell your indexed annuity to a settlement funding company.
Indexed annuities are quite different from variable annuities, which pay interest based on the performance of securities chosen by the annuity holder. Indexed annuities are also distinct from the fixed annuities that pay a fixed interest rate.
What Do Indexed Annuities Provide?
Indexed annuities earn more than fixed annuities when the financial markets perform well, and most indexed annuities additionally offer some limited protection against declines in market performance.
An indexed annuity features both a market-based return and a guaranteed return. It offers more potential than a fixed annuity, and there is less risk than you face with a variable annuity.
But if you decide on an indexed annuity, examine the fine print. Indexed annuities are good for some portfolios, but indexed annuities are also exceedingly complicated, and they can vary a great deal in quality and reliability.
How Do You Purchase Indexed Annuities?
Insurance companies sell indexed annuities and require buyers to make either a single payment or a series of payments. On a specified date, the annuity disburses scheduled payments or a lump sum to the owner.
Indexed annuities often limit gains to a particular percentage (called the participation rate) of an index’s performance. The participation rate may be 100 percent or as little as 25 percent. Indexed annuities usually offer a participation rate from 80 to 90 percent.
Thus, if the stock index your annuity is linked to gains 15 percent, an 80 percent participation rate yields 12 percent. Some indexed annuities provide high participation rates for one or two years and then reduce those rates.
What Else Should You Know About Indexed Annuities?
Many indexed annuities additionally have a rate or yield cap. A 7 percent yield cap, for instance, limits the yield to 7 percent without regard to how well the index has performed. Rate caps usually range from 4 to 15 percent and may change.
For leaner years, your indexed annuity offers a standard minimum rate guarantee that may be as low as 0 percent or as high as 3 percent. The way returns are determined depends on the insurance company, so it is imperative to understand the company’s terms.
Some indexed annuities permit an insurance company to adjust the participation rate after you have made the purchase, so buyer beware. Consult with a trusted financial advisor or estate planning lawyer before you make the commitment.
Selling Your Indexed Annuity
If you need immediate cash, you can sell an indexed annuity to a structured settlement buyer for a lump sum. You may need to obtain permission from a court to make this transaction, and you will also need the approval of the insurance company that sold you the indexed annuity.
To receive an estimate of your indexed annuity’s value – or to learn the details and facts about selling your indexed annuity to a settlement funding company – speak with one of the funding professionals at Universal Funds. It would be our privilege to serve you.