Minimum interest rate is an area of indexed accounts that is widely misunderstood. A lot of agents seem to think you can have both a high minimum interest rate and a high indexed component. If your agent tells you this, show him (or her) the door, because they do not have a clue, how the product works.

When you make a deposit for an indexed annuity, the first thing an insurance company does (after deducting its acquisition expenses) is to purchase enough commercial bonds to protect your principal and your guaranteed minimum interest. It then uses what is left over to hedge the stock market index you have selected and hopefully, produce bonus interest for the account. The key words here are: ‘what is left over’ . The higher the minimum interest guarantee, the lower the amount of the ‘left over’. The converse is also true, the lower the minimum interest rate, the more funds available to produce bonus interest.

The management of an indexed account is a balancing act between minimum interest and maximum potential return from the indexed side. Funds used to produce interest on one side, can not be used to produce income on the other. Assuming a quality insurance company, the lower the interest rate the higher the amount of indexed interest you should receive. Because the stock market moves in cycles, sometimes up and sometimes down, you will not receive a higher return every year. However, over a period of years, the lower minimum interest account should provide much greater indexed returns than one with a higher minimum interest rate.

	An Indexed Account is a Balancing Act Between Minimum Interest Guarantees & Maximum Index Bonuses

If a minimum interest rate is important to you, you should seriously consider whether you should be purchasing an indexed policy at all. If you are looking for a balanced approach, splitting your funds between a traditional interest annuity and an indexed annuity would probably be more efficient than trying to make one policy do double duty. Look for a high quality fixed interest annuity for some of your commitment and put the balance in an indexed annuity that will provide you the highest possible bonus interest.

If is difficult for a product to serve two masters, especially when the goals are direct opposites of one another. How many multi-purpose tools have you seen that are better than the tool specifically designed for a single task? Annuities and life policies are no exception.

Every indexed annuity is different, but the guaranteed minimum interest will almost always be expressed in terms of a minimum annual interest rate such as 1.75% or 3%. Often, the minimum interest guarantee will apply to only a portion of the deposit. For example a guaranteed return of 1.75% on 87.5% of the premiums deposited, equals out to an equivalent return of 1.53125% on the entire deposit. In these situations, the minimum interest is often tied to the principal guarantee. (see Surrenders & Principal Guarantees)

Another variation is when the minimum interest is actually deposited to the account. Does the policy automatically credit your account with the minimum interest in those years in which the index is below the minimum, or does the guarantee only apply after a designated holding period, say five or ten years. Crediting the minimum interest annually is more like a bank account, but the liquidity is an additional cost to the insurance company and it will reduce your total potential return.