With recent interest rate hikes, the Fed’s current target rate of 5.25% to 5.5% is now the highest it’s been in 22 years, making this an ideal time to take advantage of financial products that work well in a higher interest rate environment. While CDs and fixed annuities may immediately come to mind, there’s an additional product worth considering right now – a fixed index annuity.

A fixed index annuity, which is available from life insurance companies, offers the potential for higher interest rates than bank products and protects your principal from loss. You earn interest based on the performance of -an Index such as the S&P 500, subject to the carrier’s current participation rate and cap. Both the participation rate and cap are influenced by interest rate changes and are relatively high now thanks to the Federal Reserve’s last 11 rate hikes.

Let’s see how this might play out for you as the potential owner of a fixed index annuity. If the stock market index you’re tracking rises 10% year-over-year and your fixed index annuity has an 80% participation rate, then 8% is the increase you’ll get. The insurer may have a cap in place instead of a participation rate, so if the stock market returns a rip-roaring 30%, your annuity is likely to be credited with significantly less, 12% if the cap is 12%. If you see these limitations as dark clouds, here’s the silver lining: Curbs on upside performance are balanced by protection from downside risk. And each year you can get a fresh start which means if the market index drops 20% in a year, you don’t have to wait for the index to gain that 20% back to start making money. Each year you get interest credited to your account. That interest is locked in and becomes part of the guaranteed principal.

Again, when the performance of the stock market is poor or negative, a fixed index annuity offers a guaranteed floor that protects earnings and principal.

Remember, an annuity is backed by the financial strength of the insurance carrier. There’s no FDIC insurance, so it’s smart to purchase the product from a financially strong insurer with high marks from the major third-party rating agencies.

You’re giving up a certain degree of liquidity during the term of a fixed indexed annuity just as you would with a CD. Many products allow withdrawals of up to 10% per year and impose a surrender charge on percentages above that. The surrender charges are typically higher in the early years and drop as time goes on. With most fixed index annuity products, the penalty for a total withdrawal goes away after 7 to 10 years. Some people use the 10% free withdrawal provision to create retirement income while leaving alone what they have in the market.

When people hear the term “annuity,” their first question often relates to the cost of the product. While variable annuities have a reputation for being expensive, many fixed index annuities have zero fees. The insurance company makes money on the spread between what they pay you and what they earn. This can be a reasonably priced way to pursue growth and protect principal. You’ll pay more if you choose to add riders, such as one that guarantees minimum withdrawals even if the annuity value drops to zero.

If you’re like many people who’ve focused on the negative impact of higher interest rates after shopping for a car or home equity loan, it’s time to look on the bright side. Fed action has given you the opportunity to earn healthy returns with minimal or no risk. If you’re a conservative investor who’s retired or approaching retirement, view this environment as a gift…one that won’t be available forever. If you think a fixed indexed annuity may be right for you, act quickly but also prudently, preferably with the advice of an experienced financial professional.

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