Indexed annuities can provide the purchaser with various options for interest crediting. The buyer has the option to elect a declared rate, which would function the same as a traditional fixed annuity. However, indexed annuities are designed for higher potential interest rates, and provide other allocation options such as the S&P 500, mutual funds or other indexes to determine the rate of interest.

All indexed annuities have a floor of zero, meaning the absolute worst-case scenario due to a downturn in the market index is a consumer might receive no interest in a particular year and will not lose any previously credited interest or premiums. For example, if you purchased a $100,000 indexed annuity and it earned $10,000 in year 1 you would start year 2 with $110,000. Then lets assume the s&p 500 declined 35% in year 2. At the end of year 2 your annuity would still be worth $110,000. Even though you didn’t earn any money in year 2, your indexed annuity protected you from the market decline.