What Is The Difference Between A Traditional Annuity And An Index Annuity?
The difference between index and most traditional fixed annuities is the crediting of excess interest beyond the minimum guaranteed rate. In a traditional fixed annuity the initial and renewal interest rate is generally decided by the insurance companies’ net investment income from their portfolio and other market and internal factors. With an index annuity the rate is based on the performance on an independent index. The degree to which the customer participates in this performance, their participation rate, is determined by the carrier at the time of the initial premium. This rate is either guaranteed for the surrender period or may be declared more often. The participation rate may either be expressed as a percentage of calculated index movement, which is calculated by deducting an asset fee or a yield spread or a combination of both. For example, if the calculated index gain was 10% for the year and the participation rate was 70%, the annuity contract would be credited with 7% inte
