Indexed Interest Potential

Understanding Annuities

Understanding Annuities:

Indexed Interest Potential

An important part of your retirement strategy may be understanding annuities. Particularly, fixed indexed annuities, or FIAs, may be beneficial to you. The term “fixed” may lead you to believe that fixed indexed annuities offer little flexibility. However, FIAs do come with quite a few choices. For example, you can choose the index which you’d like to link with your annuity. In the case of an FIA, your principal is not invested in the stock market, but your money does have the potential to grow based on an external index or indexes.

Another choice offered to FIA owners: the crediting method. Basically, insurance companies design rules and timelines that guide how they calculate an index’s interest. With this data, they see how much credit, if any, is paid to your annuity. Some FIA owners, for example, choose a monthly crediting method, rather than an annual one.

Also, the crediting method of your annuity may use an average of the index’s value over time. Others, meanwhile, determine the interest rates based on the difference in index value from one specific time to another. Lastly, you may have an FIA that uses an annuity contract date to indicate its index value. So, in other words, the value of the index is examined on the same day every year.

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Safety and Security

FIAs come with many benefits. But, the biggest one, and probably the main selling feature, is the safety that they offer. Even if your FIAs index or indexes decrease in value, your money will not. In fact, it’s part of the agreement that the issuing insurance company must keep your money safe.

While you do not lose money when your index of choice is down, you do have the potential for indexed interest when the index is up. Typically, an FIA provides a reasonable rate of return** when the indexes are up. But, your money is guaranteed* protected when they’re down. 

Understanding annuities and knowing this is crucial when planning for retirement.
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What Affects Your Interest Rate?

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To determine indexed interest, some annuities use a spread. A spread works by subtracting a certain percentage from the increase of the index. Typically, this calculation uses a set time period. For example, if the annuity increases by 9%, and the spread is 4%, the annuity would get a 5% credit of interest.


There may be a max amount of interest that your FIA can earn. Usually, a term of one month or year is what the insurance company uses when looking at how much the annuity increases. Basically, you’re either paid the index calculation interest or the CAP rate, which is lower.

Participation Rate

Essentially, a participation rate means that you don’t get the entire amount that the index increased by. Instead, only a certain percentage of the value is used. In other words, it only takes part in some of the earnings.

Understanding Annuities:

Growth Potential

If the rate of the FIA index is higher than a certain amount, the earnings hit the FIA account.

But, your annuity’s value doesn’t sink if its index happens to drop, either. Factors such as the participation rate, CAP, and spread impact your interest rate. Every individual’s situation is different, and therefore, the choices you make regarding your annuity will be different. WE want to make sure you understand annuities and how they work. You can learn more about this by attending an educational seminar, whether in-person or online, or by scheduling a one-on-one, no-obligation meeting with us.

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