A type of annuity in which an insurance firm credits an annuity owner with a return that is based on changes in an index, such as a stock index (e.g., the S&P 500 composite stock price index). The annuity pays its interest depending on the performance of the defined index.

It is a promise (effected in a contract known as an annuity contract) to provide returns linked to the performance of a market index.

An annuity contract has two phases– the accumulation (savings) phase and the annuity (payout) phase. During the accumulation phase, an insured pays either a lump sum payment or a series of payments to the insurance firm. The insurance firm credits the insured’s account with an interest amount based on an indexed investment option’s return. During the annuity phase, the insurance firm makes periodic payments to the insured. Otherwise, payment can be made in a lump sum amount. An indexed annuity may be issued as a security; however, most indexed annuities are not required to be registered with a market regulator.

Indexed annuities, also known as equity-indexed annuities or fixed-index annuities, combine hybrid features. For example, registered index-linked annuities (RILAs), a type of indexed annuity, often termed as buffer annuities, may come with both upside limits and downside protection.