Guaranteed Growth in FIAs
A fixed index annuity (FIA) essentially has two “account” values that grow: the policy “account value” and the “accumulation value”.
When premiums are paid, they are loaded into the policy account, increasing account value. Portions of the account are typically allocated to one or more market indices, hence “index” annuity. Annuity account funds are not actually invested in any market index funds; rather, they are pegged to an index (or several indices), meaning that if the index goes up during a certain time period (usually one year), then the account value is credited accordingly. For example, let’s say the account value is $100K on January 1, 2019, and is allocated to the S&P 500. If the S&P 500 index goes up 7% during the year, then the account value will be $107K on January 1, 2020. Generally, the crediting formula has a cap. Let’s say the cap is 9%. That means that even if the S&P 500 goes up 12%, the account value will be credited the cap value of 9%, not 12%.
On the other hand, if the S&P 500 were to drop 15%, the account value would be credited 0.0 percent. In other words, there is no downside risk, and principal is always protected from year to year.
Growth of account value is tax-deferred.
To entice annuity owners to keep their money invested in the annuity company, and as a reward for doing so, annuity policies often offer an annual bonus in the range of 5% to 10% to the current “accumulation value”. The accumulation value is the sum of the account value plus whatever bonus amounts have been added. The accumulation value is the value used to calculate the lifetime income payout rate. So, in addition to whatever amount is credited to the account value, a guaranteed bonus adds to the accumulation (or benefit) value. If a policy holder decides to surrender the policy, he does not receive the accumulation value, rather he gets the account value, which might be much less. But, if he maintains the policy, allowing the annuity company to invest and profit from the funds, then the owner benefits from the larger accumulation value.