Fixed Indexed Annuities
These conservative investments have become a popular alternative to bonds.
Fixed indexed annuities can be very useful investments. As the name implies, FIAs are fixed annuities with a rate or return linked to the performance of a stock market index (often the S&P 500). Because of this stock market exposure, they can sometimes bring conservative investors very nice returns – often, considerably better returns than the ones provided by CDs, bonds, or money market accounts. They really aren’t designed to outperform the stock markets; they are designed to outperform the fixed markets.1
Principal protection and a chance to benefit from market gains. During the accumulation phase of an FIA, you have the opportunity to benefit from stock market gains while your principal is protected against stock market losses. The annuity contract usually guarantees you a minimum rate of interest on your purchase payments while the annuity is growing; the insurance company involved will credit you with either the minimum return stated in the contract or a return based on the performance of the linked index.1
If you are skittish about the stock market, you can potentially realize the benefits of stock market participation through this comparatively low‐risk investment. If the linked stock market index has a bad year, you don’t incur a loss.1
Participation rates to note. Each FIA has a particular participation rate. The participation rate signifies the percentage of the invested assets within the annuity keyed to the linked index. Let’s say you have an FIA linked to the S&P 500 and the participation rate is 60%. That means 60% of your invested assets are exposed to the index. If the S&P 500 gains 10% across a year, this means your annuity gives you a 6% return for the year (before any fees and administrative charges). Compare that 6% potential return to so many CDs and money market accounts which often return substantially less.2
Some FIAs measure an index’s gain on an annual basis, others over the entire term of the annuity. Sometimes there are “caps” on just how high a return you can realize. From time to time, participation rates may be reset by the insurance company. Occasionally, a margin or “spread” determines the index‐linked interest rate instead of a participation rate (if your annuity gains 10% and the spread is 2.5%, your interest‐linked credit is 7.5%.)2
Tax‐deferred growth, an income stream & often a death benefit. Most FIAs give you all the features of a fixed annuity: your earnings are not taxed, and when the distribution phase of your annuity starts, you can receive periodic (usually monthly) income payments. (It is your withdrawals that are taxed.) There is often a guaranteed minimum death benefit payable to your beneficiary when you pass away.2
No annual contribution limit. If you need to put away more retirement savings NOW, the contribution limits on IRAs can be frustrating. Would you rather have a retirement account you can only put a certain amount into annually, or an account to which you can contribute as much as you want?
FIAs (and other annuities) have no IRS‐imposed contribution ceiling, and no IRS‐imposed income limits above which you cannot contribute. Consider them as nice complements or supplements to (not replacements for) IRAs and basic employer‐sponsored retirement plans.3
Make no mistake, these are long‐term investments. Many of these annuity contracts are 6‐7 years or longer. If you need to withdraw your money from the annuity during the accumulation phase, there is usually a surrender charge and there could also be a 10% IRS penalty. Fixed indexed annuities do require a long‐term outlook and a long‐term commitment. The fees for FIAs can also be high compared to other investment vehicles.3
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note ‐ investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 ‐ marketwatch.com/story/fixed‐index‐annuities‐as‐bonds‐alternative‐2013‐08‐21 [8/21/13]
2 ‐ insurance.illinois.gov/Life_Annuities/equityindex.asp [9/10/14]
3 ‐ personal.vanguard.com/us/help/FAQAnnuitiesContent.jsp [9/10/14]