Understanding Fixed Index Annuities
A fixed index annuity (FIA) is a contract between you and an insurance company designed to help you achieve your long-term retirement goals. In exchange for your premium payment, the insurance company provides you income starting at some time in the future. The major benefits of an FIA are that the principle and credited interest accumulate by benefiting from stock market gains but are protected against market losses. In addition, any earnings are tax deferred, and they can provide lifetime income to you and your beneficiaries guaranteed by the insurance company.
To better understand fixed index annuities, you must know about the two phases to a FIA process, the accumulation phase and the payout or distribution phase. The accumulation phase, perhaps ten years, begins when you purchase the annuity. During this phase your account value earns interest based partly on a fixed interest guarantee and partly on the gains in a stock market index such as the S&P 500. The interest credited to your account is not taxed until the distribution phase when you receive a payout so the full benefit from compounding interest is achieved. If a financial emergency occurs during this phase some fraction, usually about 10%, of the total premiums can be withdrawn without penalty but a more significant or full withdrawal will usually incur surrender charges. The amount of the charges decreases the longer the annuity is held.
The distribution phase begins when you decide to receive income from the annuity. There are a number of payout plans available including fixed guaranteed monthly payouts during your lifetime, a lump-sum payout, payouts to beneficiaries after your death, and nursing home benefits. You decide the best method for the distribution based on your needs now and in the future. Regardless of your choice of payment plans and your life expectancy, you or your beneficiary can be guaranteed a total payout at least equal to the total of your premiums. An important optional feature for you may be the death benefit that, should you pass away before you begin receiving payouts from your account, your beneficiary can receive either fixed payments from your account or the value in a lump sum payment. Keep in mind that all guarantees are based on the claims-paying ability of the issuing company.
Benefits of Understanding Fixed Index Annuities
The benefit from having credited interest based partly on stock market gains can be substantial. In other types of annuities credited interest is based on a predetermined fixed interest rate, the gain or loss associated with mutual fund type investments, or variable interest rates. In a fixed index annuity part of the return is based on a stock index of your choosing, typically the S&P 500. It works like this, if the index you have chosen increases by some percentage during the year a portion of that increase is applied to your account. The portion applied is determined by one and in some cases two factors. Some fixed index annuities have a cap interest rate that can be applied, for example if the index rose say 12% for a year but you had a cap of 8% then you would receive the 8% credited interest. If the index rose only 5% then you would receive the 5%.
Some fixed index annuities have a participation rate that defines what percentage of the index gain is applied to your account. In the case of a 10% gain in the index if the participation rate was 80% then credited interest of 8% would be applied to your account. It is possible to have both a cap and a participation rate that would be applied after the cap rate was applied.
A third rate determining option called a spread is available for some fixed index annuities where a fixed interest rate amount is subtracted from the index gain before applying interest to the account. If the spread was 3% and the gain for the index was 10% then 7% would be applied to your account.
The primary reason fixed index annuities are far outselling other annuity types is because they benefit from gains in the stock market index but protect against any losses. And, all gains applied during previous years and in future years are locked-in and preserved and will not be affected by single or multiple yearly losses in the stock market.
Are you better understanding fixed index annuities? Are FIAs right for you? Possibly. Certainly one upside is there is no downside. If your financial goals are long term and the benefits mentioned above of participation in stock market gains without participating in their losses, tax deferred accumulation, and protected assets with choices for payouts and death benefits guaranteed by the insurance company are important to you then you should contact us at (972) 473-4700 today.