Fixed Index Annuities
Get your questions about fixed index annuities answered!
What Are Fixed Index Annuities?
A fixed index annuity is a type of fixed annuity that is guaranteed a minimum gain without ever facing any losses. The annuity interest earnings are linked to the movement of a stock market index rather than being in the stock market.
Who Are Fixed Index Annuities For?
Fixed index annuities are for people who want to receive more interest than a traditional fixed annuity will give without the risk of putting money in the stock market. Fixed index annuities are particularly beneficial to people nearing retirement age who can’t afford to risk a drop in the stock market.
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The Benefits of Fixed Index Annuities
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Learn More About Fixed Index Annunities from the Safe Money Man
A fixed annuity is where your money is contractually guaranteed to be safe and protected. An index annuity is a type of fixed annuity where your interest earnings every year are linked to an outside index like the Standard and Poor’s 500 or the Dow Jones Industrial Average. Both are stock indexes but your money is never actually in the stock market. The insurance company will credit interest every year based upon their formula of how that index performs, and you will be credited interest each year where you receive part of those index gains but you would never receive any of the losses. It’s a critical element to receive part of the gains but none of the losses.
For example, if you had your money in the stock market and lost 40% one year you would actually have to earn 67% the next year just to get back to even. Index annuities were designed back in the mid-1990s. I like them and own them myself. They were designed with the intent that the interest earnings each year on a fixed index annuity should be greater than other fixed accounts, like bank CDs, money market accounts, or traditional fixed annuities. You have a great opportunity to earn interest higher than those. If the stock market is going straight up, you are not going to do as well in this fixed index annuity as you would in the market, but your money is protected here in case we have a big loss. Each policy year those index gains are credited to your account and can never be lost. Each policy year the insurance company will credit gains according to the index strategies you’ve selected. Your interest earnings are actually credited to your account. Once your interest earnings are credited they can never be lost due to stock market losses. You can never lose those gains, and that can be crucial for you in trying to save for retirement. Remember the index return should be greater than other fixed types of accounts like CDs and other traditional fixed annuities.
Who are index annuities for? They are for people who like to earn more interest than the CDs, money markets, savings accounts and traditional fixed annuities. They would like to earn more interest than that, but they don’t want their money at risk. They are also meant for people who are in or have been in the stock market but maybe they are getting close to retirement. Most people just can’t afford another large drop in their account because they don’t have time to make it up. What’s really nice about some longer term index annuities is that they will give you an upfront cash bonus, anywhere from 2% to up to 7% cash immediately added to your account. For example, if you had $100,000 they would add up to $7,000 just to kickstart your account and that’s really nice. Also one other feature I want to mention on pretty much all index annuities is they have a penalty-free withdrawal per year of 10%. That will be very important on a future topic we will discuss. Fixed annuities don’t have fees but do have surrender charges if you surrender your policy before the end of the term which can be from 5 to 10 years. At the end of the term 100% of your money is free to move if needed. Or, it can stay right where it’s at and continue to earn interest linked to a market index.
Now, if you were to purchase an index annuity would your results be the same as this? I doubt it because this is just a certain time period and the market had two significant drops during that period. Will the stock market have losses like that again? Possibly, but possibly not. I will say that this annual reset method where the gains are calculated every year is crucial. We have had some clients receive gains of 8% in their index annuity because the gains in the stock market were pretty good.