What is a Fixed Indexed Annuity

Fixed indexed annuities (FIA) are a form of fixed annuity that earns interest due to changes in a market index, measuring the performance of the market or part of the market. The interest rate, even if the market goes down, is guaranteed to never be less than zero.

  • Tax-deferred financial instrument provided for the long term by insurance providers

  • Your account value is protected from market loss, but it does have the chance to grow by earning interest based on the strength of an index or indices you choose.

  • You are also able to allocate some or all of your money to a fixed-rate approach that earns a guaranteed rate of interest.

  • If you feel that the moment is right to start receiving income payments, you can annuitize your contract for a specific period or the annuitant’s life.

The insurance provider can enforce a limit on the amount of interest you can earn in a specified period, to help balance the value of the downside protection. But again it’s important to remember that you can’t lose money based on declines in the market. It is that peace of mind that makes indexed fixed annuities so appealing.

How Does It Work?

Fixed indexed annuities typically provide you with a choice of methods to possibly grow your money: An option for fixed interest rates using index-based options for crediting your interest on a cap or participation rate approach.

1. The Fixed-Rate Strategy

The fixed-rate strategy earns a guaranteed interest rate over one year. The interest rate is declared on the anniversary of your contract at the time you purchase your contract and yearly renews on the current new rate.

2. Index-Based Approaches

With index-based approaches, your money will rise according to one or more market indices, such as the S&P 500 ®. The interest rate that you can earn is usually calculated over a predetermined period and may vary based on the annuity features, including the option of allocating your money to a strategy based on a cap or participation rate.

A cap rate is an upper-interest limit that can be credited over the term. A participation rate is also an upper limit on what can be credited but is based on a percentage of the performance of the index. Cap rates and participation rates are fixed at the time of purchase and reset after each contract term.

The safety of a floor protects your principal and your earnings. The floor prevents a loss of value to your annuity even if the index decreases during your period. Your principal is protected, and any interest credited. You can’t lose money based on performance at the market.

Important Considerations

1. Do I Have The Flexibility to Access My Money If I Need It?

The fixed indexed annuities are designed for purposes of long-term financial planning. If you need to withdraw money, though, then you can. Keep in mind, however, that you may incur penalties and/or fees depending on how much you are taking out and when. These may vary according to product and state. Ask for details from a finance professional.

2. How Does a Fixed Indexed Annuity Affect My Taxes At Year-End?

One advantage of an annuity is tax deferment. Before you withdraw, you pay no tax on any interest you receive so that more of your money stays saved, any interest credited will continue to build up, and your assets will grow faster than with taxable investments such as CDs.

3. Does a Fixed Indexed Annuity Give a Death Benefit?

Yes, it does. Fixed indexed annuities offer your loved ones a built-in death benefit which allows you to leave a legacy when you pass away. There are a variety of options for beneficiaries, depending on the product, that may include payment of a lump sum, regular income payments, deferment of receiving the death benefit, or taking over ownership of the annuity contract. Your financial consultant can give you product-specific information.

Why Opt For a Fixed Indexed Annuity?

As part of your overall financial strategy, a fixed indexed annuity can be a smart choice for several reasons:

  • You can take advantage of the protection while keeping the growth opportunity

  • You can earn interest based on the performance of your selected indices without the risk of actually investing in the stock market

  • Your money is protected from any downturn in the market

The formulas used by insurance companies sometimes mean that interest added to your annuity is based on only part of an index change over a specified period.

Participation rates, cap rates, and spread rates are all terms that explain how the amount of interest applied to your annuity may not represent the change in its entirety. But if the index goes down, 0 interest is added to your annuity over that period. Then, your annuity value will not go down until you withdraw the money.

When you buy an indexed annuity, you don’t directly invest in the market or the index. Some indexed annuities offer you more than just one choice of index. Many indexed annuities also offer the choice of placing part of your money in a fixed interest rate account, with a rate that will not change over a given period.

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