How Do Indexed Annuities Work?

By Compuquotes Team on August 2nd, 2008

When it comes to the stock market, it can be a dog eat dog world. Entire lives can be changed, for the good or the bad with the click of a mouse engaging a single trade or transaction. The reason for this is that individuals can attain an incredibly high return on one trade, but at the same time, they engage themselves in a risk if they make the wrong investment. One wrong decision can devastate a person or a business financially in the same manner that it can provide high returns.

Because of this, many people do not consider the stock market a worthy investment, and even express fear and apprehension towards it. In light of this, recent years has brought the development of new investment strategies and products that can allow individuals to experience the benefits of returns on their investment without a high risk gameplan. One such investment product is called the indexed annuity, and this is a very popular gameplan among today's most reputed investors.

Indexed annuities are usually purchased from an insurance company, and thus the investor can be secure in the fact that these companies are under legislation that will protect their assets. The legislation guiding insurance companies is fairly strict as federal legislation requires that the insurance company holds an amount of reserve funding that will be equal to the value of your annuity policy. Some state laws also legislate that surplus capital is ensured so that your protection is maximized.

The term annuity is used in reference to the investment an individual makes when they are looking for a low-risk investment that will give them some form of long-term growth. The advantages that annuities provide over alternative investment products is that the benefits are tax-deferred and growth of the investment is long-term. Other benefits include interest rates that are guaranteed, protection at probate, and an income that is lifetime. Further, purchasing an indexed annuity will also ensure that your principal investment is secured and protected, yet you maintain earnings on this at the same time.

The indexed annuity works as an annuity that is fixed such that investors can take advantages of the stock market trade without taking large risks that will devastate them financially. Investors can use indexed annuities to invest a principal amount of money without the worries of a fluctuating marketplace. Indexed annuities also ensure that investors will pay a lower interest rate on any income that they gain from their investment.

Thus, indexed annuities will ensure that the individual will receive back a minimum of the earnings they've invested, regardless of what is actually happening in the marketplace. Because of these benefits, the indexed annuities strategies and products are becoming a very popular means for investors who still want to invest and maximize their earning potential without making a large financial risk.

The primary drawback to indexed annuities is that with little risk comes little return. This is the only risk however that an investor will make with indexed annuities. Returns on the initial investment will not be as high as they would be with a higher risked investment, however indexed annuities will still provide larger returns on the investment than a standard fixed annuity would give. There are also penalties and tax liabilities experienced if the investor wishes to take their money out earlier than planned. However, because annuities are typically used for long-term growth and for retirement planning, the indexed annuity is a good choice for the safe investor who is reluctant to take risks.

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