What is true regarding indexed annuities?

Indexed annuities are designed to offer returns that are linked to the performance of a specific market index, such as the S&P 500. This connection provides policyholders with the potential for growth based on the index's performance while typically offering some level of principal protection, meaning the initial investment amount is safeguarded regardless of market fluctuations. This feature allows indexed annuities to offer a balance between safety and the opportunity to earn higher returns than traditional fixed annuities, which do not have such a performance-based component.

While it may seem that these annuities come with no associated risks, they do involve some market exposure, as the returns depend on the index's performance. This means there's a possibility that returns can be lower than expected if the index does not perform well. Unlike variable annuities, indexed annuities generally offer more rigidity in their structure, such as caps on maximum returns and specific participation rates, which can limit the upside potential. However, they are typically less flexible than variable annuities, which allow investors to choose how their funds are allocated among various investment options. Understanding these characteristics can help in determining the suitability of indexed annuities for different financial goals and risk tolerances.