What typically characterizes an indexed annuity?

An indexed annuity is characterized by payments that are adjusted based on a specific market index, which often helps to protect against inflation. This means that as the index performs, the payments can increase, reflecting changes in the economic landscape or cost of living. This feature allows the annuity holder to benefit from potential market gains while still receiving a level of income that can keep pace with inflation over time.

The mechanism of linking payments to an index allows for a combination of planning for income stability and capturing potential growth. This type of annuity is designed to offer a balance of risk and reward, making it an attractive option for those concerned about the diminishing value of money over time. By having payments that can adjust based on inflation, the annuity provides a safeguard for the purchasing power of the income received, which is critical for long-term financial health, especially in retirement.

Choosing this option reflects an understanding of how indexed annuities are structured to enhance benefits for the policyholder while offering a distinct feature compared to traditional fixed annuities where payments remain constant.