Fixed Index Annuity Explained

Fixed Index Annuity [FIA] – Advantages & Disadvantages

Reposted:

Originally posted by AnnuityGuys.org

There are no perfect investments or retirement strategies that solve every contingency. It is more likely that a combination of investment strategies and financial vehicles will ultimately give you the diversified retirement plan that you are looking for. A Fixed index annuity offers several advantages that may suggest a foundational position in your retirement planning; however, they to are not without their disadvantages.

As with all investments, there are pros and cons to be aware of and take into consideration. These characteristics for some individuals may be a true disadvantage, and for other individuals they may offer a needed advantage with no negative impact based on one’s retirement planning objectives.

Fixed Index Annuity Disadvantages:

• 10% IRS penalty on withdrawals prior to 59 1/2 years of age
• Early withdrawal penalties or surrender charges for large withdrawals prior to maturity or when withdrawing in excess of the 10% annual surrender-free portion
• Ordinary income tax owed on earnings during the withdrawal or income payout stage
• LIFO: Last in first out tax requirement so earnings are taxed first, unless annuitization takes place, which then uses a tax exclusion ratio
• Fixed index annuities are not FDIC insured
• Fixed index annuities do not capture the full upside of the stock market
• Caps, participation, spreads and declared fixed interest rates are all subject to change on an annual basis
• It is possible during a down year or years to have zero-interest crediting

Fixed Index Annuity Benefits

• Safety: Backed by highly rated, state regulated insurance companies
• Tax Deferred Growth
• Participation in a portion of stock market gains with no risk of loss
• Higher Return: Better interest rates typically than CDs, money markets and bonds
• Life Insurance: Death payout guarantee options
• Liquidity: Flexible withdrawal privileges
• Unlimited Contributions, unlike IRAs and 401(k)s
• Inheritance: Pass money directly to heirs bypassing probate
• Lifetime Option: Income you can’t outlive annuitization or a Living Benefit Rider.

Fixed Annuity with Indexing Options
[FIA, Fixed Index Annuity]

• Lump-sum or periodic contributions
• Invested in mostly high quality A-AAA bonds
• Annual interest crediting risk. Insurance company guarantees principal.
• Higher rate potential based on index performance (such as S&P 500, Dow Jones, NASDAQ, etc.)
• Moderate growth
• 4% to 8% interest crediting potential; varies with index performance
• 3- to 14-year term
• Sophisticated, greater potential
• Guaranteed retirement income options
• Annual fees, minimal to none

Investors that need their money prior to retirement may prefer a CD, money market or a securities-oriented investment to avoid the potential 10% IRS tax penalty imposed for taking money out of an annuity prior to the age of 59 1/2. For individuals at or near retirement, fixed annuities may be a better choice. If you’re looking to have a larger retirement nest egg, fixed annuities may help you meet that goal better than securities, CDs or a money market account.

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Safe Money Annuities

Fixed Indexed Annuities - Growth Potential Based on a Market Index

A fixed index annuity gives you more risk – but more potential return than a fixed annuity – but less risk and less potential return than a variable annuity. It is also known as an equity indexed annuity.

As its name implies, its value is linked to a market index, such as the S&P 500 Composite Stock Price Index*, a collection of 500 stocks intended to represent a broad segment of the market.

Designed for retirement saving

Like other types of annuities – fixed or variable, immediate or deferred – indexed annuities are long-term vehicles designed to help you save for retirement.
Keep in mind that if you take your money out early, you may have to pay surrender charges and, if you’re younger than 59½, an additional 10% tax penalty. Naturally, if you take an early withdrawal, your death benefit and the cash value of the annuity contract will be reduced.

Fixed index annuity features

• Indexed annuities don’t directly participate in stock or equity investments
• Withdrawals or surrenders before the expiration of an indexed period will result in no index participation for those amounts
• Failure to maintain the contract until it matures may result in no participation in the equity index
• Actual returns may be less than the return of the linked index - possibly even negative if you surrender any of the contract before the expiration of any applicable surrender charge period.

How account interest is determined

While sales of indexed annuities have grown in recent years, some of their features can be difficult to understand, such as the various methods for calculating the interest.
Some common methods include:

• Annual reset/ratchet, based on the annual change in value of the index
• Point-to-point, based on the change in the index’s value from the beginning to the end of the annuity’s contract term
• High water mark, based on the increase in index value from the beginning of the contract’s term to the highest index value at various points during the contract’s term – typically contract anniversaries

Other factors can influence indexed annuity values

Indexed annuity values are influenced by:

• Participation rates – The participation rate is how much of the index increase you actually receive. For instance, if your participation rate is 75% and the index increases 8%, you’ll earn 6% for the period because 75% x 8% = 6%.
• Interest rate caps – Some indexed annuities have a maximum rate - or cap. If the market goes up less than the cap, your account value will be credited with 100% of the annual performance of the index, not including dividends or distributed capital gains. If the market goes up more than the cap, your account value will be credited with the amount of the cap. If the market goes down, your account value remains the same, less any withdrawals you may have taken.
• Fees and charges – The fee you pay, also known as the margin or spread, is generally deducted from the interest you earn. For instance, if you pay a 2% fee and the index earns 9%, you would actually be credited 7% because 9% - 2% = 7%.

Not a deposit • Not FDIC or NCUSIF insured • Not guaranteed by the institution • Not insured by any federal government agency • May lose value

* Standard & Poor’s^®, S&P^®, S&P 500^®, Standard & Poor’s 500 and 500 are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by Nationwide Life Insurance Company. The product is not sponsored, endorsed, sold or promoted by Standard & Poor’s and Standard & Poor’s makes no representation regarding the advisability of purchasing the product.
It’s important to understand that the guarantees and protections offered by fixed and indexed annuities are subject to the claims-paying ability of the issuing insurance company.

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