The Nuts & Bolts
With an indexed annuity, your return is based on the performance of a particular financial index, such as the Nasdaq or S&P 500. The index’s performance determines how much your annuity will grow. If the index goes up, your annuity value will increase. If the index goes down, your annuity value will NOT decrease.
You may choose to diversify into multiple index options and change those options each year upon account renewal periods.
How much of the index performance credited to the annuity is normally dictated by a Participation Rate which is a percentage of the index return credited to the account.
Example:
Mr.Jones has an Indexed Annuity Allocated into the S&P 500. His participation rate is 50%.
If the S&P 500 receives a return of 20% over a 1 year period, he will receive a 10% gain in his annuity. (50% of the return)
Can You Lose?
Short Answer is no, the only way your account will decrease is based on a withdrawal or Fee (which we do not like fee based annuities).
Example:
If the S&P 500 receives a loss of -20%, his account will have a gain of 0%. He will never receive a negative return, even if the index does.
We call this the Power Of Zero!
Indexed annuities guarantee you will not lose money even if the index declines. This guarantee is provided by the insurance company that issues the annuity.
Source: https://www.annuityexpertadvice.com/annuity-101
