What defines an indexed annuity?

An indexed annuity is defined by its connection to a stock market index for potential returns. This type of annuity typically offers a minimum guaranteed return, along with the possibility of higher returns that are based on the performance of a specified index, such as the S&P 500. This linkage to an index allows for growth potential that can exceed that of a fixed annuity, while also providing some level of security from the volatility of the stock market.

The unique structure of indexed annuities often incorporates features such as caps or participation rates, which determine how much of the index's return is credited to the annuity. This makes indexed annuities attractive for investors looking to have some exposure to market gains without fully participating in the risks of direct stock market investments. The combination of growth potential and downside protection is what sets indexed annuities apart from other financial products like fixed or variable annuities.