How an Indexed Annuity Works
You pay the carrier a lump sum. Growth links to a market index — a basket of stocks the contract names. When the index rises, the carrier credits your account with part of the rise. When the index drops, a floor guards your principal: index drops do not cut it.
You do not buy the index. You do not own stocks. You own an insurance contract whose growth formula points at the index.
Caps and Participation Rates
Two dials shape your growth:
- Cap. The most you can earn in a period, no matter how high the index climbs.
- Participation rate. Your share of the index's rise. A 60% rate on a 10% index rise credits you 6%.
These dials are how the carrier pays for your floor. Less upside for you, less downside too.
The Honest Trade-Offs
- Capped upside. In a roaring market, you will trail it. That is the price of the floor.
- Long lock-ups. Surrender periods on indexed annuities often run long. Early exits hurt.
- Moving parts. Caps and rates can reset. Read the contract — then read it again.
- The floor is a promise. Like every carrier promise, it rests on the carrier's ability to pay claims.
No rates listed on this site. Caps, rates, and floors differ by product and change over time. I will show you current figures for any product we discuss — from the carrier's own materials.
Frequently Asked Questions
Do I own stocks with an indexed annuity?
No. You own an insurance contract. The index is just the measuring stick for your growth.
Can the floor fail?
The floor is the carrier's promise, and promises rest on the carrier's ability to pay. No company is failure-proof. Check the carrier's financial strength ratings.
Why would I accept a cap?
Because the cap buys the floor. If sleeping well matters more to you than chasing top returns, the trade can make sense.