Annuities have been around for centuries, actually since the Roman Empire. They have been used as a savings vehicle, and primarily as a way to provide a lifetime guaranteed income. About 20 years ago the first indexed annuities came on the market and they have become, by far, the most popular form of annuity. The primary attraction is the potential for a higher rate of return than the traditional fixed annuity.
The graph below shows the difference between two different investments – the stock market (S&P 500) and an indexed annuity. As you can see from the graph, the green line, which is the indexed annuity, has performed extremely well. The fact that the indexed annuity has never had a negative year, but has been able to participate in a portion of the market gains, has made it, over the long term, an attractive investment option.
Indexed annuities offer a low, guaranteed, interest rate plus the potential for additional interest credits based on a percentage of the gains of a specified stock market index – the S&P 500® or other, sometimes less traditional, indexes. No matter how much the stock market declines, the annuity owner’s accounts are not affected, because annuity premiums do not directly participate in the stock market by purchasing individual stocks or mutual funds.