Generally speaking, an indexed annuity pay interest that is determined based on the gain of a stock market index when the index is up. An indexed annuity never credits index losses.

There are many options available and many different indexes that you can choose depending on the product.

Three key elements:

1. A "cap" means that there is an earnings limit to how much the account can earn in any given year. For example, if your account has a 7% cap it means that if the index gains 5% so do you but if the index gains 25% your account will only increase by 7%.

2. A "participation rate" means that your account will earn a percentage of the index gain not limited by a cap. For example, if you have a 50% participation rate it means that if the index increases by 7% you will earn 3.5% interest. If the index increases by 25% you will earn 12.5% interest.

3. A "fee" (also known as a spread) means that before interest is credited to your account the fee is deducted from the index gain. For example, if you have a 2% fee or spread and the index increases by 7% you will earn 5% interest. If the index increases by 25% you will earn 23% interest.

The most common is the Standard & Poor's 500 (S&P 500) which is used as the benchmark for the United States stock market. Others include the Dow Jones Industrial Average, the NASDAQ, the Hang Seng (representing Asian stock markets), the EuroStox 50 (representing the European stock markets), The Russell 2000 and even the Gold Index for those who wish to hedge against inflation by indexing with Gold.

First, your money is not tied up as you can surrender the policy at any time and possibly incur a surrender penalty. Surrender penalties most often begin at 10% and decline to zero over 5 to ten years.

Most index annuities allow you to withdraw your interest at any time with no penalty just like a certificate of deposit.

Most index annuities allow you to withdraw 10% of your account value (or initial deposit) every year, beginning 30 days to one year after you begin.

The most popular indexed annuities also allow you to withdraw up to 20% of your account value in any year that you didn't withdraw 10% in the prior year. (Example, deposit $100,000 in the account in 2007 and not make a withdrawal. After the first anniversary of the account you could withdraw 20% or $20,000 (assuming there was no interest credited in year one).