Definition
An indexed annuity is an annuity in which credited interest is linked to the performance of a market index through parameters set by the insurer, rather than to a declared fixed rate or to direct market participation.
Why it matters
Indexed annuity is the umbrella term most often used loosely to cover several distinct arrangements. Naming it precisely separates the fixed indexed annuity, where the insurer controls crediting parameters and principal is not exposed to index loss, from the registered index-linked annuity, where the individual retains a defined portion of market downside.
How it works
An indexed annuity credits interest based on the movement of a reference index, mediated by parameters the insurer sets — cap rates, participation rates, and spreads — that determine how much of the index movement is passed through. In a fixed indexed annuity, crediting is floored so that principal is not reduced by index declines, and the insurer's cost is carried in the renewal of the crediting parameters. In a registered index-linked annuity, a buffer or floor provision exposes the individual to a defined portion of index loss in exchange for higher participation, and the buffer or floor terms are explicit. The two arrangements share the insurer-controlled crediting mechanism but differ in whether downside is retained.
In practice
Within the indexed annuity category, the question that separates the arrangements is whether you retain any market downside. A fixed indexed annuity does not expose principal to index loss; a registered index-linked annuity does, by a defined amount, in exchange for more upside participation. For either, the crediting parameters are insurer-controlled and renewable, so the questions to put to a professional are which parameters can change, on what schedule, and what the arrangement would credit under named index scenarios at the minimum guaranteed parameters.
In the Longevity Standard Framework
Indexed annuity is a product category the claims lens characterizes distinctly. The fixed indexed annuity carries the claim profile risk sharing — transferred; adjustment mechanism — discretionary; liquidity — conditional; cost structure — crediting parameter drag. The registered index-linked annuity carries risk sharing — hybrid; adjustment mechanism — discretionary; liquidity — conditional; cost structure — hybrid, because its buffer or floor leaves a defined portion of downside with the individual. Because the category spans a transferred-risk and a hybrid-risk arrangement, its structural reading lives in the fixed indexed annuity claim profile and the registered index-linked annuity claim profile rather than in a single block.
Related terms
- Fixed indexed annuity
- Registered index-linked annuity
- Crediting parameter drag
- Cap rate
- Participation rate
- Fixed indexed annuity claim profile
- Registered index-linked annuity claim profile
- Buffer