Indexed Interest Potential

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Annuities: Indexed Interest Potential

Based on its name, you might assume that a “fixed indexed annuity” offers little flexibility. However, annuity income actually offers a lot of flexibility and different options in comparison to other retirement accounts. For example, the choice of which indexes to connect your FIA to.

Fixed Indexed Annuity Income

Another benefit of an FIA is the option to choose the crediting method. For example, the choice of monthly, quarterly, or annual payments. There are a few different ways that the interest rate can be calculated and a few different factors that affect it.

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Senior couple laughing while on a walk in the park, discussing annuity income

How Does Fixed Indexed Annuity Income Increase?

Organize your annuity to align with at least one index. The insurance company then tracks how well the selected index or indexes are doing using a particular crediting method. While you earn interest when the index rises, you have no risk of losing money if it falls.

Each individual situation is different: The way your annuity works will depend on the individual contract and your own choices. It’s important to consider your choices carefully. Don’t hesitate to get in contact with us to ask questions about them.

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Interest Rates

Understanding how annuity income is calculated is important to incorporate it into your retirement strategy. Factors that impact the interest rate include participation rates, caps, and spreads.

  • An annual or monthly cap usually applies to your FIA. When the selected index is above the cap, the interest rate is not based on the index rate. Instead, the insurance company calculates your interest based on the cap rate.
  • One element sometimes implemented into calculating fixed indexed annuity income is the participation rate. This is used to determine the amount of index increase applied to your interest rate. A cap is usually followed by a spread.
  • Annuity income is often calculated using a spread. Essentially, index gains are subtracted from an amount in a given period. For example, the spread on an annuity is 4% and the index grows by 9%. The contract is then credited with 5% indexed interest.