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Fixed Index Annuities
A Fixed Index Annuity is an insurance contract between you and a life insurance company. You pay premium to the insurance agency in return for regular income payments over a period of time, beginning at some point in the future.
A fixed index annuity (FIA) is a hybrid annuity product. It takes the best of what other types of annuities have to offer, combining the attractive features of each while working to eliminate the not-so-great features.
Here’s a basic outline of the benefits a fixed index annuity may provide as part of your retirement income strategy.
- A fixed index annuity offers guaranteed lifetime income just like an immediate annuity. But, unlike an immediate annuity, fixed index annuities have a death benefit. With an immediate annuity, the insurance company is betting on you not living as long as you think you’ll live…when you pass on, the insurance company keeps whatever is left of your original principal.
- Fixed index annuities, just like old school fixed annuities, earn a baseline fixed interest rate over a fixed term while also providing a principal guarantee.
- Just like variable annuities, fixed index annuities provide the opportunity to participate in stock market gains. However, unlike a variable annuity, your principal is 100% protected against stock market losses. And, fixed index annuities have eliminated the fees involved with variable annuities, making them a much less expensive option for a retirement income solution.
Unlike 401Ks and IRAs, you can make unlimited contributions to your annuity and the growth is tax-deferred. After a certain time period (as soon as 12 months) you can begin withdrawing an income stream based on the accumulation value of your contract. The accumulation value is equal to how much total premium you have paid plus 100% of interest earned minus any withdrawals, surrender charges, unpaid loans you have taken against your principal, and charges for optional riders you may have selected.
When you purchase an FIA, your money, less any applicable fees, has the potential to earn interest based on changes in an external index, like the S&P 500 or Nasdaq-100. If the markets go up, you enjoy the opportunity to participate. If stocks fall, then your contract value does not decrease. You will never lose your premium value or any of the interest you have earned––regardless of how the market performs in the future.
Here is one thing you should understand fully: There is a trade off when it comes to investing in an FIA. In exchange for principal and earned-interest protection, fixed index annuities limit the amount you can make if the markets go up. These limits can be pretty steep. To protect yourself, you need to understand what exactly you are getting into––especially when it comes to managing your performance expectations.
If you are looking to looking to make a killing on the stock market then annuities are not a good fit for you.
However, if you are looking for a retirement investment strategy that protects your principal, has some good upside potential, and provides a predictable guaranteed lifetime income stream in retirement, a Fixed Index Annuity may be something to consider.
There are hundreds of details we could go into about the merits and disadvantages of considering a fixed indexed annuity. And, when you factor in that there are a wide range of FIA products on the market, there is no way we can cover everything there is to know about them on a single webpage. We urge you to give us a call or click to schedule an appointment if you’re interested in learning more about whether an FIA makes sense for you.
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