Up until a decade or so ago, your choice of annuities came down to fixed annuities – which promise a guaranteed interest rate and guarantee of principal – and variable annuities – which is non-guaranteed and invest in various stock market based separate accounts (like mutual funds) investment. But more and more, successful individuals are turning to a third choice: indexed annuities. Until 2006, it was called equity indexed annuities but now it is called fixed indexed annuities or indexed annuities.
Fixed indexed annuities are designed to mirror the performance of stock market indices without actually investing in the stock market. Insurance companies are using many well-known stock indices such as the S&P 500, DJIA, NASDAQ 100, EURO STIXX 50, Bloomberg Barclay U.S. Aggregate Bond and some proprietary institutional grade dynamic indices. You can participate in the upside of the stock market while minimizing your risk of its downturns. Equity indexed annuities assure a minimum guaranteed interest rate that you will receive after a certain duration of time. You also have an opportunity to gain higher interest if the stock market index rises. Insurance companies use a variety of formulas, depending on the design of a particular annuity, to determine how a change in the index correlates to the amount of interest that will be credited at the end of each index term (most commonly on an annual basis). The formula used usually consists of two parts, the crediting method such annual point-to point, multi-year point-to-point, monthly point-to-point, monthly averaging or daily averaging and; a limiting factor such as cape rate, participation rate & spread rate or margin.
Here are some advantages of Fixed Index Annuity:
Accumulate for retirement:
Fixed Index Annuity (FIA) offer the potential to earn interest based on changes in an external index. These annuities give you a choice of several indexes and even some exclusive index options.
Protect your principal:
Your contract can earn interest based on an external index, but you’re not actually buying any stocks or shares of an index. This means the money in your FIA (your “principal”) is not at risk due to market losses.
You don’t pay taxes on the interest your annuity earns until you take money out. This helps compound your interest, so the money in your contract can accumulate faster.
Some FIAs offer riders (either built in or at an additional cost) to help you address specific needs. They also offer a variety of crediting methods and flexible options for receiving income.
Receive guaranteed income:
Annuities are designed to provide a reliable stream of retirement income, either for a set period or for as long as you live. Some FIAs even offer you the potential to get increasing income.
Leave a legacy:
FIAs pay your loved ones a death benefit if you pass away before you start taking scheduled annuity payments. (And, if properly structured, the death benefit is not subject to probate.)
Fixed indexed annuities – like their fixed annuities counterparts – have maturity dates that range from three to ten years, a declining surrender charge schedule, and tax-deferred growth. The difference is they do not pay a set rate of interest; you receive some portion of the benchmark stock index growth.
he equity indexed annuities participation rate is generally ranges from 50 to 90 percent depending on the overall interest rate environment. Suppose, for example, you purchase an S&P 500 contract and, over the ten-year contract, the index rises by 100 percent. You would realize about three-quarters of that growth if participation rate were 75% without risking your principal.
Fixed indexed annuities should be carefully considered by any individuals who are seeking higher returns than traditional guaranteed investments but do not wish to risk their principal. Not all equity indexed annuities are same and they are quite complex. It can be a great investment if done right and can be an absolute poor choice if purchased from a wrong insurance company or from a wrong advisor or for a wrong reason. More mature investors nearing retirement who still want to benefit from the growth of equities may be a good candidates for equity indexed annuities if they have more than 5 million in the net-worth and enough other liquidity.
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