Annuity Index

The annuity index often refers to the index linked annuity,  indexed annuity or equity indexed annuity. An annuity index is popular because of low maintenance and the annuity index often provide higher return for annuity investors.

What is an annuity index?

An annuity index is a special annuity whose return is not based on a general account or a separate account of diversified investments but on a specified index. The most popular annuity index is one based on a specified equity based index.

The annuity index is designed to mirror the performance of an index such the S&P 500, Dow Jones Industrial Average, Russell 1000 Index, or the S&P 100. Many people prefer investing in an annuity index because it is an easy way to participate in the market performance. Also, statistics show that few fund managers actually manage to outperform S&P indexes and other indexes. This way, investors don't have to worry about what investments are in their separate investment account which the annuity payments are based on.

Investing in an annuity index also usually has the added advantage of being cheaper because you don't have to pay fund managers to manage the investment account. However, actual prices of the annuity index depend on the policies of the insurance companies that issue the annuity.

What index is used for the annuity index?

Each annuity index has its own index or set of indices to mirror after. You need to check into what index your annuity index is being linked to before you invest in that annuity index. An investor can also choose how much he/she wants his/her annuity follow the index. This is specified in what is called the "participation rate" which is given as a percentage. For example, if an investor wants to participate in only 50% of the market, the participation rate would be 50% and if the index goes up 10%, the investor's annuity index portfolio would only go up by half that much (50%).

The beauty of having an annuity index rather than just an investment that mirrors an index is that when the market is performing terrible, the insurance company often has a clause to guarantee that your annuity index account will not go below a certain amount. You must however read the terms and prospectus of the annuity index that you invest in because each annuity index can be different. The downside of investing in an annuity index is when the market performs very well, your annuity index account will not perform as well. You are effectively trading the insurance aspect and peace of mind for lower returns.