The Security And Risk Of An Index Annuity

A good addition to your retirement program is an index annuity

. If you're risk adverse and want a guaranteed return but still worry about the ravages of inflation, the index annuity is perfect for you. Unlike a fixed annuity, you have the opportunity to increase your return in indexed annuities. Aside from some of the guarantees offered by variable annuities, you have the advantage of participating in the growth of a specific market index with none of the risk.

There are many different types of index annuities. The differences begin in the index they follow. Some use the S&P 500. This tends to be one of the more popular indices. While there are a variety of others, another popular index to follow includes foreign markets. Often these markets, particularly in growing countries are more volatile. If you had an index annuity back in the early part of 2000 that used the stock market in India as its index, your account would show dramatic growth with none of the potential of loss.

Insurance companies offer index annuities that provide a base interest rate. If the index selected increases, the owner participates in the growth at a specific percentage. If the market drops or remains flat, the owner of the policy receives the guaranteed interest rate.

Index annuities also have different provisions and guarantees. The guarantee rate tends to be slightly lower than those returns of fixed products, including those of fixed annuities. That is because of the tremendous potential for growth.

The amount of participation in the market growth varies dramatically from policy to policy. Some policies offer as little as a 30 percent participation rate but have a higher guaranteed rate. Other policies may offer a lower guarantee rate but go as high as 90 to 100 percent participation.

Depending on your concern of inflation and belief in the index, you select, it's best to shop for a product that fits your specific needs. The younger you are, the more important it is to increase the participation in the index. Inflation changes a good monthly income into pennies as prices increase and the buying drops. The elderly don't normally have the time it takes to erode an income to pocket cash but younger participants do.

If there's a chance you'll need some or all of the funds in a few years, you need to check two provisions in the policy. The first is the surrender period for the policy. An index annuity may have a surrender period as short as a year or two or as long as 15 years. Of course, the shorter the better if you believe you might need to access funds. You do pay for that privilege, however. Often the participation rate and base guarantee rate are lower when the surrender period is shorter. If you remove the funds early, there are often penalties that erode any earnings.

Some policies contain penalty free access to the funds. This access varies in amount and number of times it's available. It might be simply interest or a percentage that's an annual amount, once in the lifetime of the policy amount or cumulative amount.

When you look for an index annuity to fit your retirement program the best method is to know first what you need. After that, you should compare policies. The easiest way to do that is to use online sites that show a number of different index annuities at one time. Consulting an annuity specialist is also beneficial to compare the fine points of the policy.

by: Jonathans Tyler

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