Equity Index Annuities
Indexed annuities, also known as equity indexed annuities, are contracts between an individual and an insurance company. These types of annuities earn their return based upon an external market index such as the S&P 500 or the DJIA (Dow Jones Industrial Average).
Similar to other types of annuities, an indexed annuity will provide tax-deferred growth of the funds that are inside of the account. This means that there is no tax due on the gain of the funds until the time they are withdrawn.
In addition, an indexed annuity can also provide a guaranteed stream of income to its holder at retirement, as well as certain other riders and income payment options that essentially allow its owner to “customize” the annuity to more closely fit their specific needs.
How Indexed Annuities Differ from Other Types of Annuities
There are several ways in which an indexed annuity differs from other types of annuities. One of the most distinguishing of these is the fact that an indexed annuity holder can lock in market gains while at the same time being protected from market downturns and keep their principal safe from loss.
In other words, even though there is the potential for market linked growth, there is no exposure to market risk. Therefore, these annuities can essentially be thought of as offering “the best of both worlds”.