A fixed index annuity is a type of annuity contract that can also have a life insurance rider which gives investors exposure to an underlying stock market index while providing downside protection of capital.
Fixed index annuities track the performance of indexes such as the S&P 500, Nasdaq, or other major market indexes. Fixed indexed annuities give the investor a certain level of upside participation in the index selected and give downside protection of capital.
Most Fixed indexed Annuities are designed in two ways to measure upside performance and downside protection.
The fixed indexed annuity gives the client a performance trigger on the index which is associated with the annuity. For example, if the performance trigger is 8%, then if the index is positive after the anniversary date, then you receive the maximum of 8%. If the index is above 8%, then you only receive 8%. If the index is negative, you have a protective floor. For example, if the floor is 15%, then anything between 0-15%, you lose 0%, and if the index is lower than 15%, you participate in the losses after 15%.
The fixed indexed annuity gives the client a cap on the total performance upside they can receive on the annuity. For example, if the cap is 40%, then the investor will participate in the return of the selected index up to 40%, the investment return is then capped.
Indexed annuities can be thought of as less risk than a traditional ETF or Mutual Fund, however they do cost more internally and have performance rules. A fixed index annuity contract might tack on one or more of these features. Be sure to closely study a contract to see exactly how your gains and losses will be limited.