Annuities Explained

The 60-second version

1. It is an insurance contract. You pay a premium to an insurance company; it credits interest and can later pay income.
2. Interest is linked to an index. The insurer looks at how the index changed over a set period (for example, annual point-to-point or monthly average) to figure the index-linked interest.
3. Limits apply. A cap rate sets the most interest you can earn, a participation rate sets how much of the index change is used, and a spread/margin may be subtracted. For example, if the index rises 9% and the participation rate is 70%, the index-linked interest would be 6.3%.
4. There is a floor. If the index goes down, the index-linked interest for that period is usually zero rather than negative. Surrender charges, MVAs or rider fees can still reduce what you get back if you take money out early.
5. Growth is tax-deferred. You generally don’t pay tax on interest until you withdraw it.

Each company decides how its index-linked interest is calculated, so compare the crediting method, cap, participation rate and surrender schedule before you buy.

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This is general education, not a recommendation. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Read your contract and its disclosure for exact terms.