What is an indexed annuity?
Indexed Annuity is a special type of annuity, a contract concluded between an insurance company and a buyer who provides a guaranteed income, usually throughout life, recipient or annuitant. There is no requirement for income to start immediately after the purchase, and in fact many annuits are postponed with annuity - that is, they are growing within the retirement plan, and the decision to convert into guaranteed income - or not - postponed until a certain point in the future. It is a way in which the value accumulates, which sets indexed annuity from all other annuits. However, indexed annuity is in the US a type of fixed annuity, whose interest rate is associated with the performance of the market index of its own capital, such as standard and running 500 (S & P500). The attraction of solid annuits, including indexed annuits, is that there is no possibility of losing the main. If the market index at which the interest rate indexed annuity is based on a decline during the measurement period, does not simply earnNo interest. On the other hand, if shares that are the main annuity of variable annuity are invested in a decline in value, the owner's account loses principle & Emdash; Variable annuity has no disadvantage protection.
If the attraction of indexed annuity is that its owner can participate in all profits on the market without suffering any risk of disadvantage, equally attractive function is the "ratchet and reset" principle. This means that the basic value of the index against which profit or loss is calculated as a percentage - reset to the anniversary of the annuity. For example, if the Director of Variable Annuity is invested in shares worth $ 100,000 in the US (USD) at the purchase date and these shares lose 20% of their value in the first year Annuity lost $ 20,000 and is now worth $ 80,000. If in the second year the main annuity stocks are invested in a profit of 25%, ie $ 20,000, at the end of the year the annuity variable has a value of 100,000 USD - exactly where it started.
The use of the same numbers for indexed annuity brings dramatically different results. The initial value is $ 100,000 and at the end of the first year, the basic market index lost 20% - say from $ 2,000 to 1600. The indexed annuity value is still $ 100,000 - no principal has been lost because the interest rate is associated with market performance, the principal itself has not been invested in stocks. It is now 1600. In the second year, the market index is increasing by 25% and the second year will end immediately, where it started, to 2,000. Interest rate for indexed Annuits, associated with the index, is set at 25% and the new value indexing would be 25% higher than at the beginning of the year, or $ 125,000. The same amount of money and the same market - yet two different types of annuity and two completely different results.
Of course, the volatile market can be a highly unpredictable and insurance companyDy sets the limits of interest rates paid by indexed annuity. For example, the degree of participation determines what percentage of market profit will be used. The rate of 75%would mean that the 25%experiencing the market index in the example would be reflected in an interest rate of 18.75%, ie $ 18,750. In addition, most insurance companies impose a straight interest -interest indexed annuity that they can earn in any year. Careful consumers who are considering the indexed annuity ensure that the rate of participation and restriction of interest is not so large that they will have any market insignificant.
Like all other annuity, indexed annuity has favorable tax treatment, and interest was terrified taxes until they actually paid off. On the other hand, the certificate of deposit, funds of money market and earnings of other savings vehicles are taxable in the year when they are credited and thus reduce their compound power. On the other hand, when the recipient inherits any annuity after the owner's death, even if the exploration usually embraces themT, income tax is immediately payable for the entire tax part of the annuity-resident revenue and, if it is also tax-qualified, principal. In many cases, the recipient may move the beneficiary to a higher tax group, resulting in more taxes payable than if the annuity was annuitized or liquidated before the owner's death.