Understanding Fixed Indexed Annuities
Fixed indexed annuities are commonly referred to as “hybrid annuities” as they combine many of the features of the other available annuity types. Fixed index annuities offer a guaranteed minimum interest rate with the ability to participate in market gains for increased earnings. At the end of each contract year, the issuing insurance company analyzes the growth of the index your annuity is linked to over the course of the previous 12 months and credits your contract for any growth up to a predetermined maximum. This maximum can be an annual or monthly cap or a percentage of the index’s growth.
Since fixed index annuities are linked to an index, they tend to have much lower administrative fees when compared to a variable annuity.
Basics of Fixed Index Annuities
Fixed index annuities are a combination of what many consider the “best aspects” of the other annuity types, sharing many features of both the fixed and variable annuity without many of their downsides.
- Guaranteed Returns: Fixed index annuities provide a contractual guaranteed return, which can range anywhere from 2% to 5% annually.
- No Stock Market Loss: While fixed index annuities are tied to a market index, they are not directly invested and thus, do not carry the risk of losses during a market downturn.
- Potential for Gains: Since fixed index annuities are tied to a market index, they have the potential to experience significant growth as the stock market rises. Returns are based on index performance like the S&P 500.
Advantages of Fixed Index Annuities
Fixed index annuities offer the ability to participate in stock market gains when markets are good, while providing guaranteed protection should the market perform poorly. Based on your contract, you will also receive a guaranteed minimum return, which you receive regardless of negative market performance. Should the markets do well, your percentage will increase. This features is why fixed index annuities are often called “Hybrid Annuities,” as they share the protection of a fixed annuity, with the gains potential of a variable annuity.
Disadvantages of Fixed Index Annuities
While there a numerous benefits to owning fixed index annuities, there are also some downsides as well. Many investors consider fixed index annuities complex, and as such, they often require the assistance of a qualified professional experienced in working with the large number of products available.
While they provide higher returns when markets perform well, you may not receive the entire return of the market index your annuity is tied to. These returns are calculated differently based on your product contract and the index they’re tied to and may contain an earnings cap.
As with all annuities, there are surrender fees associated with early withdrawal.
Are Fixed Index Annuities Right for Me?
Fixed index annuities are perfect for someone wanting to grow their retirement savings, while protecting them from losses in the stock market. Since fixed index annuities are tied to the markets, they offer the potential for gains while protecting your principal should markets perform poorly or crash.
As people begin reaching retirement age, their risk tolerance becomes significantly lower and they generally seek out investment products that will protect their savings. With a fixed index annuity, you can protect your retirement savings while allowing the potential for decent growth.
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