Indexed Annuities, What Are They and How Do They work

Article submitted by Jay K. Perry with Kramer & Kramer Estate Planning.
For more information, he can be reached at 623-974-1966.

Prior to 1995 you had 2 choices in the Annuity Investment Arena. You could purchase a Fixed Annuity which has the benefit of Safety, and earnings based on current interest rates, variable Annuities which money is put into separate accounts that are to Mutual Funds. These annuities have risk which is explained by a prospectus, but these accounts are built to make returns by the rise and fall of the stock marketing these Mutual Fund-like accounts and also charge fees on an annual basis. All annuities in general are Tax-Deferred, have withdrawal privileges, asset protection, and annuitization. However, in 1995 annuities changed. We now have a 3rd option, an annuity called an Indexed Annuity. An Indexed annuity provides the best of both worlds.

The Indexed Annuity gives you the safety of a Fixed Annuity and the high earning potential of a Variable Annuity. In Indexed Annuities insurance companies link your money to the returns of various financial indexes; an example would be the S&P 500. The reason that they decided to link to indexes is because of the strong track records of the various indexes available. So an Indexed Annuity gives you two absolute guarantees (in writing). If the market goes up, you make money. If the market should fall in value, you don't make anything but you don't lose anything either and the company does not charge a fee. Imagine going to your planner and saying, "I will invest with you if you guarantee to take a fee when you make me money, but you have to waive your fee when you make me nothing." You lock in at the current accumulated value (all principle plus interest) of the annuity. Indexed Annuities have various crediting methods, participation rates, fees and so forth. All annuities have surrender charges and annuities fall into three categories for term of surrender charges: Short Term, Intermediate Term, and Long Term. Each term has its advantages and disadvantages.

All annuity companies have brochures for clients to review before making a decision on which annuity is best for you. There are a lot of different styles, types and lengths of terms. At Kramer & Kramer, we recommend that you review Indexed Annuity brochures with us or your planner before purchasing.

Also make sure you understand in general how the annuity works. Kramer & Kramer has been in business for 33 years and clients trust us not only with their Estate Plan, but also to make sure they are getting the best Indexed Annuity for them. We go through annuities in depth and also their whole financial profile, so together we can make an educated decision on which annuity is best for them.