A. Fixed indexed annuity is far more popular than its counterpart - fixed annuity, what attracts consumers to it?
To understand why fixed indexed annuity is more popular, one needs to understand the trade-off from a fixed interest rate to an indexed interest rate.
Annuities are spread-based products
The insurance company accepts your premium and earns interest, subtracts a spread for its expenses, then credits you a fixed rate or buys an option in the case of an indexed annuity.
For example, the insurance company earns 3.5%, needs 1.5% to cover expenses, and that 2% is policyholder's earning. Now the customer can either take the 2% as fixed interest, or have the company buy an option that costs 2% and the ending interest credit could be something higher or lower.
Fixed Annuity
Based on the above example, over 10 years, total return is 10x2% = 20%
Fixed Indexed Annuity
Tied to S&P 500 index performance with a 4% cap and 0% floor. Over 10 years, assume 7 years hits the cap, total return is 7x4% = 28%
So fixed indexed annuity offers 40% higher upside, what's the price for this upside? It's the reward for consumers who are willing to take the risk of their earnings, with their principal always protected.