Today's Top Ten Fixed Annuity Rates (MYGA)
Beware of Equity or Fixed Index Annuities!
You may have seen the Dateline: NBC show about insurance agents selling equity index annuities (EIA), which are not equities at all. In fact, they are actually just a hybrid style fixed annuity with an index interest crediting option (FIA). EIAs/Fixed Index Annuities have been criticized and attacked which, in all fairness, is mostly unwarranted. A couple of contributing factors are:
- Unqualified salesman. Far too often, the people who offer Equity Index Annuities/Fixed Index Annuities to retirees are inadequately trained, and sometimes they don’t accurately explain the investment principles and retirement concerns involved.
- Overzealous salesmen overstating performance. Fixed index annuities are like any other investment; used properly they work great, used in unsuitable ways they can be a disaster.
**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.
Unfortunately, they are often misrepresented often as giving full market returns, however at times they do equal or beat the market, unfortunately, that is not always true. In a strong economy with stocks doing well, it is expected that the fixed index annuity will fall several percentage points behind the market return. However, a Fixed Index Annuity with a 5% to 8% interest for many retirement plans, would be considered a win-win situation.
FIAs are annuity contracts between you and a life insurance company. They are simply a fixed annuity that is linked to the performance of a stock market index, commonly the S&P 500, Dow Industrial or the NASDAQ. An FIA has a **guaranteed minimum rate of return (**guaranteed by the insurance company and not the FDIC), and it gives you the ability to capture a portion of stock market gains with no market losses. That’s the upside. Overall, Fixed Index Annuities are not designed to beat the stock market even though many have over the last decade. They are basically designed to out-perform the fixed markets such as CDs, money markets and bonds.
One downside is that you usually have to hold onto a fixed index annuity for several years to enjoy its full advantage. The term to maturity is typically 8-12 years, and sometimes longer. That money is allocated to that annuity during that time. You can’t just go and pull your money out like you can with a money market or savings account. If you do need to withdraw money from an FIA soon after you sign the contract, the following may apply:
1) You may have to pay a surrender charge. It varies from annuity to annuity, but it can be in the vicinity of 9-12% of your principal.
2) Most Fixed Index Annuities allow 10% annual withdrawals with no penalty.
3) You may lose some or all of the index-linked interest that the Fixed Index Annuity has already accumulated on the portion you withdraw.
4) You will owe taxes only on the increase in value of the annuity. (Withdrawals by annuity holders younger than age 59.5 are subject to a 10% penalty levied by the IRS.)
It is important to plan properly so the fixed index annuity can be a long term solution for your retirement needs. You may lose money if you need to get out of the Fixed Index Annuity soon after you open it. This should rarely ever happen with proper planning. However, if you keep your money liquid and lose the opportunity to make an extra 2% per year for ten years, you will actually pay a lost opportunity penalty of 31% by default. That extra 2% compounded will increase your asset value by 31%. So, if you plan properly, the fixed index annuity has the potential to make a significant difference over fixed investments, cash equivalents and at times, it actually does beat the stock market!
These are the views of AnnuityGuys.com, which does not give tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader/site visitor is advised to engage the services of a competent planner/educator professional. Please consult a financial advisor for further information.