Annuity Principal Protection Explained
If you are like most investors, your retirement portfolio suffered big losses during the market crashes of 2000 and 2008, and you are looking for a solution that will help you avoid ever losing money like that again.
Stock market volatility drove investors to seek safety in principal protected investments. One of the most popular principal protected investments is the fixed index annuity (FIA).
Fixed Index Annuity Principal Protection is Guaranteed
One of the questions we hear quite often is, “how can you guarantee that my FIA won’t lose money?” In this article, we will give you an inside look how fixed index annuities protect your principal and allow you to lock in market index gains.
When you purchase an FIA, the insurance company takes the money you’ve given them and adds it to a portfolio that buys high-grade corporate and treasury bonds that earn an income stream in the form of guaranteed interest. The insurance company uses that interest – and that interest only – to conservatively invest in the market.
Here is an example. If you purchase a $100,000 Fixed Index Annuity, the insurance company invests that money in high grade corporate and treasury bonds, which draw an income stream of, for this example, let’s say 5%.
Then they take that 5%, or $5,000 of income, and invest in the market based on the index, or combination of indexes, you choose. So, to review, the principal of $100,000 invests in bonds that create an income stream, and then only the interest earned participates in stock market-related investments. This is how insurance companies are able to guarantee that you won’t ever lose money––because your principal has never been at risk in the market… only the interest.
If the market goes down, the $100,000 that the insurance company put into the bonds is still worth $100,000. The $5,000 invested in the stock market may lose value, but your contract guarantees that you see none of that loss.
So, what if the stock market goes up?
If the market goes up, that $5,000 that the insurance company put into the market would be worth more. And, you would participate in the growth. This is how these annuities allow you to benefit from stock market gains, while shielding you from any losses.
For more see:
The Fixed Index Annuity principal protection feature is one of the main reasons that annuity sales last year reached record territory in the United States.
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Disclosure: Guarantees and benefits are subject to the claims paying ability of the issuing insurance company.
Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity. Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated. A fixed annuity is intended for retirement or other long-term needs. It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. A fixed or indexed annuity is not a registered security or stock market investment and does not directly participate in any stock or equity investments or index.