Indexed Annuity

The annuitant cannot experience any loss to principal, but returns are based on the performances of stock indices (such as the Dow Jones or the Standard & Poor’s 500, etc.). 

Interest is credited based on a formula linked to a specific stock index or combination of indices selected by the annuity owner. The formula may result in no interest credited (the index goes down from the preceding crediting period), but the return to the consumer can never go below zero. If the index goes higher than the period before, the annuity will receive a return on principal based on the increase in the index, subject to a maximum cap rate imposed by the company (which receives the income that exceeds the cap amount and keeps it). 

Since there is no risk to principal, there is no SEC regulation, and no securities license is currently required to sell these products. Usually there is also the option to place some or all principal in a fixed account if the contract owner chooses to do so. The interest rate credited can be determined either on a month-to-month basis or an annual anniversary basis. 

The annuity owner never has principal (amount invested) at risk in the equity markets. In addition, much like the life version of this concept, the insurer will sometimes keep an initial percentage return before crediting the annuitant’s account.