What are the Features of the Fixed Index Annuity?

Fixed index annuities are loaded with innovation and features that are very unique to both the securities investment world and the fixed rate safe money world. This hybrid modern class of annuities features more of a balanced approach, combining to principal and accumulation with the inflation-hedging ability of limited stock market returns. Their strategic positioning limits their upside potential to less than the full upside of the stock market with the positive tradeoff of no loss years. Envision avoiding all losses and only stacking up gains. The potential is very tempting for some portion of your retirement portfolio.

Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

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Index annuities were first introduced in the U.S. about 20 years ago as an alternative to mutual fund^{^}s, allowing growth from stock market indexes with to principal in loss years. The first offerings of these annuities were readily accepted and caught on quickly. The rest is history. Cash inflows to fixed index annuities have exploded from approximately 3 billion in 1997 to over 26 billion by 2008. During the financial crisis of 2008-2009, money flowed into these annuities so fast that many carriers actually stopped taking new clients. According to the Wharton study, many fixed indexed annuities that incorporate indexing have proven (to the critics’ surprise) to give higher returns over several recent five and ten year periods of time than the index benchmarks they are crediting from.

Did you know that a fixed index annuity, index annuity, ratchet annuity or equity indexed annuity is actually and simply a fixed annuity with an optional or an extra feature? And, in addition to having a fixed interest rate choice, it also has an optional interest crediting method that uses an external market index to determine the amount of interest to be applied after a specified term of typically one year. Important things to consider when choosing a fixed indexed annuity are:

High independent ratings for safety concerns
High interest crediting for growth
Generous payouts for income
More liquidity for emergency cash needs
Shorter surrender periods or lower surrender penalties
Additional benefits such as payouts for long term care, terminal illness and death benefits
Flexible income riders that allow both lifetime income and the ability to pass any remaining account value to heirs
More indexing options for higher growth potential
Better indexing strategies for higher growth potential
Higher cap rates, higher participation, higher averaging
A larger bonus
No or low annual fees
Shorter vs. a longer reset to grow and protect accumulation
High water mark vs. annual point-to-point
Higher deferred growth of the income base
Availability of the income base for a death benefit
Joint survivor income **guarantees

There are many considerations that may be relative to your situation. What fixed index annuity works best for a 50-year-old single mother may be a total disaster for you and your wife. It is important to understand that no one fixed index annuity will give you everything you need or want. So, it is necessary to prioritize your needs. List all of your preferences and needs and then prioritize them on a scale of 1-10; 1 being the least concern and 10 being the greatest. Now start the process of comparing rates and options from top companies until you find the best overall fixed index annuity to address your unique situation. Utilizing a financial planner/educator can be of great value once you have familiarized yourself with the basic aspects of fixed index annuities.

Fixed Index Annuity Features and Benefits

Safety: Backed by highly rated state regulated insurers
Tax Deferral: Tax-deferred growth
Higher Return: Better interest rate potential than CDs and standard fixed annuities
Life Insurance: Death payout **guarantees
Liquidity: Flexible withdrawal privileges
Unlimited Contributions, unlike IRAs and 401(k)s
Inheritance: Pass money directly to heirs bypassing probate
Lifetime Option: Income you can’t outlive (Annuitization or a Living Benefit Rider)

Fixed Annuity with Indexing Options

[FIA, Fixed Indexed Annuity

& EIA, Equity Indexed Annuities]

Lump-sum or periodic contributions
Invested in mostly high quality A-AAA bonds
Annual interest crediting risk. Insurance company **guarantees principal
Higher rate potential based on index performance (such as S&P 500, Dow Jones, NASDAQ, etc.)
Moderate growth
4% to 8% interest crediting potential varies with index performance
3- to 14-year term normal
Sophisticated, greater potential
Guaranteed retirement income options
Annual fees, minimal to none

Features of Fixed Index Annuity Summary

All fixed index annuities are tax-deferred with no income tax requirement until withdrawal. This is a definite advantage over many investments like CDs, mutual fund^{^}s, stocks and bonds when considering a long term retirement investment. A long term fixed index annuity acquisition may consistently outperform CDs, bonds and treasuries. Reinvesting money that would otherwise be paid out in tax over an extended period of years is always an advantage. In addition, fixed index annuities have several benefits that can be important for retirement planning.