What is a Fixed Index Annuity?

Fixed Index Annuity

Just like all annuities a Fixed Index Annuity is a contract between you and an insurance company. This type of annuity allows for interest credit’s based off of an external index, like the S&P 500, DJIA (Dow Jones), Nasdaq 100 and many other options are now available. Although your interest credit’s are based upon the changes in the underlying index you’ve chosen, you are not actually investing in the index. The Index is only used to determine index credits and you will not receive any dividends.

Annuity Contract

Like all other form’s of deferred annuities there are surrender charges for excess or early withdrawal’s. A typical surrender charge schedule will range from 5 years to 15 years. Although withdrawals are permitted typically after the first contract year.

Penalty Free Withdrawal’s

The mass majority of annuities allow for an annual withdrawal not to exceed 10%. So you may take out up to 10% per year, without incurring a surrender charge or partial withdrawal penalty. Some annuities may have a cumulative withdrawal feature. Example: If in one contract year you take no withdrawal at all, you may have available to you a 20% penalty free withdrawal. It’s not common but certain annuities may do this all the way up to 50% penalty free.

Required Minimum Distribution

All deferred annuities are RMD friendly. If you are age 70 1/2 or older, on your IRA or qualified annuity you’d be required to draw an RMD, although the amount may be taken from another qualified plan.

Waiver Of Surrender Charges

Annuities will generally allow for a waiver of penalties for early withdrawal, for certain type’s of life event’s.

Example:

  • Nursing Home (Penalties Waived)
  • Home Health Care (Penalties Waived)
  • Terminal Illness (Penalties Waived)
  • Death (Penalties Waived)

Annuity Cap’s, Participation Rates, Spread’s

It’s no secret. Annuities give you upside market linked gains with no risk, so in the event your chosen index has lost value, your annuity WILL NOT lose any money. So your rate in this example would be 0%. In exchange for no risk of loss, the annuity company will set a cap, participation rate, spread or a combination of the 3. Cap’s can range from as low as 2% to as much as 7%, on an annual basis. These cap’s do have a floor. The company can never offer lower than what was in your contract as a “minimum cap”.

Participation rate’s can be as low as 25% of the market gain to as high as 200% of the market gain. Crazy, right? I ‘ll discuss how the can do this in a future blog. Of course there’s some moving part’s like 2-5 year crediting options, that make this higher participation rate possible. Very attractive to say the least!

Spread’s are a component of which the company take’s off the net rate of what would have been credited to your annuity.

Example: Annuity credit’s 7% but your spread is 1.25%. Your net interest rate is 5.75%.

Common Index Annuity Options For Interest Credit’s

  • Monthly Point to Point
  • Monthly Average
  • Annual Point to Point
  • Participation Rate
  • Bond Strategy
  • Fixed Interest

Each of the above type’s of crediting option’s have a multitude of available stock market indices. Some annuity companies have proprietary index option’s that can work out pretty well, but I’ve seen a few not do to great, in a given year.

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One Response to What is a Fixed Index Annuity?

  1. Henning Anderson March 1, 2018 at 7:21 am #

    Fairly layed out and explained. I would only add, some are designed for appreciating account value and some are designed for paying out for life for the client (s). Not intended to pass value onto the heirs.

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