FIXED INDEXED ANNUITIES

A fixed indexed annuity is a long-term retirement savings vehicle that offers opportunity for growth while providing principal protection in a fluctuating market. As a contract purchased from a life insurance company, a fixed indexed annuity is based on the movement of an index and guarantees a minimum interest rate over a defined period of time – and if the index performs well, the annuity has the potential for even higher earnings. Since a fixed indexed annuity is linked to index movement, but not directly exposed in the market, the principal and minimum interest rate are protected, even if the underlying index has a setback. This type of annuity is a low-risk investment with more growth potential than a fixed annuity can typically provide.

As a long-term retirement investment tool, a fixed indexed annuity can help your income planning. As part of a diverse portfolio, an annuity should help you to build your nest egg, produce a lifetime income stream, and give you flexibility to handle life’s changes like illness or long term care. It’s possible to ladder multiple annuities (similar to the way many use CDs) and have money become liquid (without surrender charges or penalties for withdrawals) at regular intervals. It’s important to note that, as with many investments, early withdrawals before age 59 ½  may be subject to federal tax penalty, and all withdrawals are subject to income tax. There are also surrender charges to consider for withdrawing more than the allowed percentage each year.

Optional riders can be added, at an additional cost, to free you from surrender charges in case of terminal illness, help secure nursing home or home health care, and even increase the payout amount to your beneficiaries. As with other annuities, it bypasses probate and passes to directly your designated beneficiaries as outlined in your contract. Whether you have minor children who aren’t ready to handle money, adult children who are a little too carefree to trust with a sum of money, or extended family, friends, or organizations you want to favor, you know your situation best. It’s comforting to have the ability to direct how and when your annuity will support the people you care about most.

As an independent agency, we have access to essentially all products on the market. Our focus is matching the ideal products that best meet your particular needs and objectives. We work with you to create the ideal strategy for your planning needs.

A fixed indexed annuity, like any other investment product, has benefits and drawbacks to consider before purchasing:

CAPS

To offer you both opportunity and protection, some indexed annuities have a maximum rate, or cap. You’re also protected against losses.

Cap Index Performance Increase to Your
Annuity Value
5% +8% 5%
5% +5% 5%
5% -3% 0%

PARTICIPATION RATES

The participation rate is how much of an index increase you actually receive. The higher your participation rate, the more of an index performance you’ll receive.

Index Performance Your Participation Rate Your Earnings
10% 80% 8%
5%  80% 4%
20%  50% 10%

FEE (also margin or spread)

The fee is generally subtracted from the earnings. As explained in the previous section about “caps,” you’re also protected against losses.

Index Performance Your Participation Rate Your Earnings Fee Your Earnings After
Fee Deduction
12% 75% 9% 2% 7%
5% 80% 4% 2% 2%
-5% 80% 0% 2% 0%

Fixed annuities are contracts purchased from a life insurance company. They are designed for long-term retirement goals. Withdrawals are subject to income tax, and withdrawals before age 59½ may be subject to a 10% early withdrawal federal tax penalty.

Potential Benefits

  • Protection from economic climate – guaranteed minimum interest rate, even in a down market
  • Principal protection – your original deposit is safe, regardless of index performance
  • Growth, plus potential, with minimal investment-risk exposure – a guaranteed interest rate grows your money regardless of index performance, and excellent performance may increase your earnings
  • Tax-deferred growth – compounded earnings aren’t taxed until withdrawn or taken as income
  • Income options – contract can be annuitized, payments can be made for a specified period of time, or an income stream can be created to last a lifetime (some options may require a rider)
  • Options for your spouse – plans vary on spousal continuation and death benefit payout timing, so do ask for clarification
  • Beneficiary protection – bypasses lengthy probate issues, and payout can be structured according to your wishes

Potential Drawbacks

  • Gains may be limited – participation, caps, and interest may be limited (a tradeoff for lower risk)
  • Early withdrawal penalties & surrender fees – know the rules to avoid costly mistakes
  • Intended for long-term goals – fixed indexed annuities are not designed to meet short-term goals
  • Complex plan details – talk to your FSG advisor for help with the language of annuities and crediting strategies

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