According to The National Association of Insurance Commissioners Buyers Guide, An indexed annuity is a fixed annuity, either immediate or deferred, that earns interest or provides benefits that are linked to an external equity reference or an equity index.

When you buy an indexed annuity you own an insurance contract. You are not buying shares of any stock or index.

An indexed annuity is different from other fixed annuities because of the way it credits interest to your annuitys value. Indexed annuities credit interest using a formula based on changes in the index to which the annuity is linked. The formula decides how the additional interest, if any, is calculated and credited. How much additional interest you get and when you get it depends on the features of your particular annuity.

Questions you should ask your Agent or the Company

You should ask the following questions about indexed annuities in addition to the questions in the Buyers Guide to Fixed Deferred Annuities

What is the guaranteed minimum interest rate?

How long is the term?

What is the participation rate? For how long is the participation rate guaranteed?

Is there a minimum participation rate?

Does my contract have an interest rate cap? What is it?

Does my contract have an interest rate floor? What is it?

Is interest rate averaging used? How does it work?

Is interest compounded during a term?

Is there a margin, spread, or administrative fee? Is that in addition to or instead of a participation rate?

What indexing method is used in my contract?

What are the surrender charges or penalties if I want to end my contract early and take out all of my money?

Can I get a partial withdrawal without paying charges or losing interest? Does my contract have vesting? If so, what is the rate of vesting?

Final Points to Consider

Remember to read your annuity contract carefully when you receive it. Ask your agent or insurance company to explain anything you dont understand. If you have a specific complaint or cant get answers you need from the agent or company, contact your state insurance department.