Everyone should observe the common sense approach of diversification in their investment and savings choices. Each of us should also have a portion of our savings in highly liquid vehicles such as money market accounts or three to six month CDs.

But there’s also a place for long-term, tax advantaged savings vehicles.

One such vehicle offers interest earnings potential linked to a stock index, but reduces the investment risk associated with investing. It’s called an Equity Indexed Annuity, sometimes known as a fixed indexed annuity or FIA.

This annuity is an alternative with appeal to Americans who understand the long-term benefits of investing in stocks but are uncomfortable with the short term losses and volatility that are an inevitable part of investing. An indexed annuity should not be viewed as taking the place of investments, and purchasing one cannot be thought of as being comparable to investing. The reason is that indexed annuities are long-term savings vehicles. They cannot duplicate the upside potential investing may offer.

An indexed annuity is a relatively recent modernization in the design of fixed annuities.

Purchased by Americans for decades, traditional fixed annuities have helped millions of seniors safeguard their savings, enjoy interest growth and create retirement income. Traditionally, fixed annuities have credited reasonably competitive rates of interest. But like many savings vehicles, the interest rates offered by fixed annuities are tied to the general level of interest rates in our economy.

In searching for a way to generate even greater interest earnings potential, a new form of fixed annuity emerged in 1995. It was similar to other fixed annuities in that it offered underlying guarantees, but it associated its interest earnings potential to the performance of a particular stock market index. This was accomplished by linking potential interest earnings to the performance of a stock index, initially the S&P 500 Composite Stock Index, or, S&P 500®.

The S&P 500 Index is a market capitalization weighted index of 500 of the largest U.S. companies (without dividends). It is unmanaged and investors cannot invest directly in it. All indexed annuities utilize an index such as the S&P 500 or NASDAQ composite index to create the potential for interest earnings based upon positive returns in the index. Back in 1995, indexed annuities increased in popularity with savers. As you might imagine, some indexed annuities generated significant interest crediting to the annuity account value as the performance of stocks surged.