Features

• The interest rate of an index annuity follows the movements of a stock market index, which is a group of stocks that represent the market. If the market does well, the interest rate you earn from the account rises. At maturity of the index annuity, you can convert your contract into a lifetime stream of income. However, according to Bloomberg, most index annuity account holders don't do this.
  
  

Protection

• Index annuities offer the advantage of security. Assuming you never withdraw anything from your index annuity until it expires at the set date, it doesn't decline in value. As such, it allows you to safely take advantage of the movements of the stock market. If prices of the stocks in the index plunge, your investment amount earns nothing but also doesn't drop in value. However, there is usually a cap on the maximum returns you can get, so you can't fully benefit from good performance of your index.
  
  

Terms

• An index annuity usually locks your funds in the account for a set period of time, which ranges from three to 16 years. If you withdraw the funds in your account before the end of the term, you may have to pay a withdrawal penalty, which can last longer than 10 years in some cases. If the stocks in the index pay dividends, your indexed annuity provider usually doesn't count them toward your annuity returns.
  
  

Considerations

• Index annuities lack regulation because neither U.S. securities laws nor state insurance departments oversee them as of 2011. The sales agents often practice aggressive marketing strategies, including expensive lunches to pitch their sales. These sales agents get up to 9 percent of your investment amount as commissions, making it tempting for them to act against your best interests. Because of the complex terms and fees, you may find it difficult to completely understand the product.