Fixed Index Annuity

Avoiding Market Volatility with a Fixed Index Annuity

People concerned that their retirement outlasts their finances, but are conservative when it comes to investing, often look at a Fixed Index Annuity (FIA). In 2014, these contracts were hot sellers, as well as in 2013 when Americans spent $33.9 billion on FIAs by those looking for a way to gain more steady retirement income with reduced risk. The ongoing low-interest rates for certificate of deposits and traditional annuities made FIAs attractive.

How a Fixed Index Annuity Works

Consumers buy a savings contract from a respected insurance broker. This contract has a tax deferred part on its interest. A FIA is indexed or linked to a stock-market index, most often the S&P 500 (which rose more than 16 percent YTD thru November 2014). The insurance company will protect the buyer from market losses, but, they also cap the amount of gains they pay. When calculating your payouts, dividend earnings are not included in the figures.

It is important that fixed index annuity buyers know that the index is a benchmark only. The insurance company does not invest consumer money in the index. This gives buyers protection and balance against the ups and downs occurring in the market.

Further protection for a guaranteed monthly payout is available as a rider on the contract. This extra cost rider do guarantee a minimum level of income for the consumer’s lifetime. Another advantage of fixed asset annuities is that upon the buyer’s death he or she can name a beneficiary and keep it out their estate – this is a great way for reducing the amount of assets going to probate.

A FIA has more risk than a standard annuity contract, lower growth is possible. Nevertheless, it has a greater potential return on investment yet less risk than a variable annuity.

There are a several steps associated with FIA contracts.

• The insurance company receives your money in either a lump-sum of periodic payments.

• Once your money goes to the insurance company it invests your premium and those of other consumers for each annuity that the company has covered.

• Taxes are deferred on interest earned by the contract until the buyer gets money from the contract. With taxes deferred, the buyer’s contract earns more money and has faster growth.

• There is an “accumulation phase” where the consumer’s annuity earns a fixed rate of return that is guaranteed by the insurance company.

• The last phase is the distribution phase. At this point the consumer gets a payout choice consisting of a lump sum, over a set time, or in monthly payments for the rest of the buyer’s life.

Some fixed annuity contracts have “participation rates” that insurers calculate on the index increase. They range to as high as 50 percent. This means if the index a contract links to goes up by 9 percent, the insurance company keeps 4.5 percent as the participation fee.

Most contracts have the buyer select the type of interest rate they want. Most choose annual. also known as annual point-to-point. This compares the index on the date of issue with the rate one-year later. This comparison is how the insurance company calculates the rate of return. Another method is month-to-month. It compares the issue date index value with each months index following purchase. The last method of valuation is “monthly sum.” Using this method means tracking; the valuation credits interest each month to the account subject to a contractual maximum.

Indexed annuities are long-term vehicles with a purpose of growing income for retirement. Buyers who take money out before retirement lose their index participation for that amount withdrawn. If the buyer is under 59.5 years old the contract could provide for surrender charges and the United States Internal Revenue service collects a 10 percent tax penalty. Also those buyers who take a withdrawal early cut the amount of the cash value and death benefit.

Each state controls through their insurance departments the way these fixed annuity contracts are sold and administered. The rules in California are different from the rules in Oregon or Nevada. In California, Precision Insurance is a trusted independent insurance brokerage that sells annuities. Since the buyer is their customer, and they do not get a fee from you, but from the insurance company, they offer an unbiased opinion on fixed index annuities. Call them at 909-752-0239. In Montclair you can visit them at 4875 W. Mission Blvd, Unit C, Montclair CA 91763 (Map).