A fixed index annuity is a contract between you and an insurance company that may help you reach your long-term financial goals. In exchange for your premium payment, the insurance company provides you income, either starting immediately or at some time in the future.
How a fixed index annuity works
Most fixed index annuities have two phases. First, there’s an accumulation phase, during which you let your money earn interest. This is followed by a distribution or payout phase, during which you receive money from your annuity.
A fixed index annuity also guarantees you will receive at least the minimum guaranteed interest credited to the contract. Remember that all of these guarantees are backed by the claims-paying ability of the issuing company.
With a fixed index annuity, you defer paying taxes on your contract’s interest until you receive money from the contract. Tax-deferred interest means the money in your contract can grow faster.
Your principal and bonus are never subject to market index risk. A downturn in market index(es) cannot reduce your contract values.
Phase one: accumulation
The accumulation phase begins as soon as you purchase your annuity. Your annuity can earn a fixed rate of interest that is guaranteed by the insurance company or an interest rate based on the growth of an external index.
Phase two: distribution
The distribution phase of a fixed index annuity begins when you choose to receive income payments. You can always take income payments in the form of scheduled annuitization payments over a period of time, including your lifetime. And many fixed index annuities allow you to take income withdrawals as an alternative to annuitization & payments. Either way, you can choose from several different payout options based on your personal needs, including options for lifetime income, guaranteed.