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  How Do Fixed Indexed Annuities Work?  
 

Like traditional Fixed Annuities, Fixed Indexed Annuities are generally purchased with a single lump sum premium. Where they differ from traditional Fixed Annuities, is in how interest credits are credited to contract values.

Traditional Interest Crediting: In a Traditional Fixed Annuity, contractholders earn a rate of interest declared by the issuing company.

• Premiums are paid into the contract

• The company invests the money in bonds, mortgages, or other investment grade securities

• The company takes its "spread" from the interest it earns (i.e. the amount of money it needs to pay the expenses of annuity issue and administration, and make a profit)

• The company credits the declared rate of the interest to the contract

Indexed Interest Crediting: In a Fixed Indexed Annuity, the same process is followed:

• Premiums are paid into the contract

• The company invests the money in bonds, mortgages or other investment grade fixed income securities

• The company takes its "spread" to cover costs and profits

What changes between these two annuities, is what the company does with the balance of its portfolio interest earnings after taking its spread. In a Fixed Indexed Annuity, the company takes the balance of its interest earnings — which in a traditional Fixed Annuity would be credited as "declared interest" — and negotiates and invests them in customized index options designed to match the index crediting formula. This should provide a better rate of interest over the course of the Index Term. Earnings from these index options are then used to credit the indexed interest to the annuity.

How does this translate into actual interest crediting?  Let us continue...

 
     
 
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