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A Fixed Indexed Annuity is a contract between you and an insurance company designed to help you achieve your longer-term retirement goals.
Earnings are tax-deferred and can provide guaranteed lifetime income to you or your policy’s beneficiaries. These guarantees are backed by the issuing insurance company.
There are two phases to the Fixed Indexed Annuity: the accumulation phase and the payout or distribution phase.
The accumulation phase begins when you purchase the annuity. During this phase, your account value earns interest based partly on a fixed interest guarantee and partly on gains in a stock market index such as the S&P 500.
The distribution phase begins when you decide to receive income from the annuity. Payout options may include fixed guaranteed monthly payouts, a lump-sum payout, payouts to beneficiaries, and nursing home benefits.
In a Fixed Indexed Annuity, part of the return is based on a stock index of your choosing, typically the S&P 500. If the index increases, a portion of that increase may be credited to your account according to the contract terms.
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 can be achieved.
If a financial emergency occurs during this phase, some fraction, usually about 10% of the total premiums, can be withdrawn without penalty. A larger 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 several 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 plan and life expectancy, you or your beneficiary can be guaranteed a total payout at least equal to the total of your premiums and earnings gained during the lifetime of the annuity.
An important optional feature may be the death benefit. This benefit states 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.
The benefit of having credited interest based partly on stock market gains can be substantial. In other types of annuities, credited interest may be based on a predetermined fixed interest rate, the profit or loss associated with mutual-fund-type investments, or variable interest rates.
In a Fixed Indexed Annuity, part of the return is based on a stock index of your choosing, typically the S&P 500.
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 used is determined by one, and in some cases two, factors.
Some Fixed Indexed Annuities have a cap interest rate that can be applied. For example, if the index rose to 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 Indexed Annuities have a participation rate that defines what percentage of the index gain is applied to your account.
For example, if the index gained 10% and 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 according to the contract terms.
A third rate-determining option called a spread is available for some Fixed Indexed Annuities. With a spread, 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 Indexed Annuities are far outselling other annuity types is that customers purchasing these types of annuities can benefit from gains in the stock market index while protecting against losses.
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.
Please give us a call if you would like help understanding whether a Fixed Indexed Annuity may fit your retirement goals.
A Fixed Indexed Annuity is a contract with an insurance company designed to help with longer-term retirement goals by offering growth potential tied to an index and protection from market losses according to contract terms.
The two phases are the accumulation phase, when account value can grow, and the distribution phase, when you begin receiving income or other payouts from the annuity.
No. A Fixed Indexed Annuity may credit interest based on an index such as the S&P 500, but your money is not invested directly in the stock market.
A cap rate is the maximum interest rate that may be credited for a period. If the index gain exceeds the cap, the credited interest is limited to the cap.
A participation rate determines what percentage of the index gain may be applied to your account. For example, an 80% participation rate on a 10% index gain would credit 8%.
A spread is an amount subtracted from the index gain before interest is credited. For example, a 3% spread on a 10% gain would result in 7% credited interest.
Many annuities allow a limited withdrawal, often around 10% of premiums, without penalty. Larger or full withdrawals may incur surrender charges, which usually decrease the longer the annuity is held.
All guarantees are backed by the claims-paying ability of the issuing insurance company.
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