Want to participate in market returns without exposure to market volatility and risk? A fixed indexed annuity could be the right strategy.
A fixed indexed annuity (FIA) is a unique financial tool that allows you to earn interest based on the performance of a market index. Most FIAs have downside protections to limit your risk exposure.
Fixed indexed annuities can be complicated, and they’re not right for everyone. However, they can also be useful tools in the right situations. Below are some key points about fixed indexed annuities and how they may benefit your retirement strategy:
Fixed indexed annuities allow you to experience market-based returns without taking on exposure to market risk. It’s done through the use of market indexes, like the S&P 500. When you open your policy, your cash value is linked to a specific index.
Your interest rate is then based on the index’s return over a given period of time. For example, if the S&P 500 has a positive returns, you may receive a higher interest rate. If the index performs poorly, you may receive a lower rate.
The rate is usually calculated using something called a “participation rate.” The participation rate dictates how much of the index return you actually receive. For example, assume your policy has a 100 percent participation rate and the S&P 500 has a 10 percent year-over-year return. You would receive a 10 percent interest rate.
Now, assume your fixed indexed annuity has an 80 percent participation rate and the S&P Index has a 10 percent return. You would then receive 8 percent interest, as that is 80 percent of the market’s return. It’s important to understand your FIA’s participation rate as it directly impacts your potential return.
While FIAs allow you to participate in the market, they don’t offer unlimited upside potential. Most FIAs have interest rate caps that serve as a maximum for the amount of interest you might earn. For example, your policy may have a cap of 7 percent. That means that your maximum interest rate in any given year will be 7 percent even if the market return and participation rate calculate a higher interest rate.
Minimum Guaranteed Rate
Fixed indexed annuities also have a guaranteed minimum rate to protect you from downside risk. The minimum rate is the lowest amount of interest you will receive in any given year. It’s an important element because it gives you certainty regarding your annual returns. You’ll never receive less than the minimum rate, even if the index goes down in value.
Optional Features and Benefits
Fixed indexed annuities sometimes offer optional features, known as riders, that you can add onto your contract. Some of the most common optional riders include:
Guaranteed Minimum Withdrawal Benefit
Guaranteed income is one of the primary reasons why many people choose to use an annuity as part of their retirement strategy. Some fixed indexed annuities offer riders known as guaranteed minimum withdrawal benefits to provide you with a predictable, lifetime income stream.
With this benefit, you are allowed to withdraw a certain amount, like 5 percent of the account value, every year. As long as your withdrawals never exceed the allowed value, the income is guaranteed for life, no matter what happens to your investment performance. Even if your account value declines, you still get the withdrawals as long as you live.
Nursing Home or Advanced Illness Waiver
Fixed indexed annuities come with a surrender schedule, which is a defined period of time in which you could face a penalty if you surrender your contract or withdraw a substantial amount.
However, an emergency could arise that forces you to take money from your contract. Many fixed indexed annuities offer a nursing home or advanced illness waiver that allows you to surrender your contract without penalty to pay for long-term care or medical costs. That extra liquidity could be helpful if you face serious illness or injury.
Curious about whether a fixed indexed annuity fits into your retirement strategy? Let’s talk about it. Contact us today at America’s Annuity. We can help you analyze your needs and develop a plan.