If you are looking to park retirement money somewhere, a fixed index annuity may also be an option to explore. A fixed index annuity shields your money from losses due to market declines. It gives limited opportunity to earn interest based on a market index’s performance. That being said, in exchange for the guaranteed protection of your money, that growth potential is limited.

Bank products will grow your money with interest over time, and they are backed by FDIC coverage. You can also use bank accounts as a source of liquidity for your money. But over time, a fixed index annuity can let you “beat the bank” with its potential for index-linked interest earnings. If you plan to use that money for retirement, the annuity can also pay you a guaranteed income stream for as long as you need it.

In this article, we will go over more on fixed index annuities, their potential for “beating the bank,” and some pros and cons for each option that are good to keep in mind.

How Do Fixed Index Annuities Work?

Just like with other types of annuities, a fixed index annuity is an insurance product. It’s a contract between the annuity owner and the life insurance company that issued the annuity.

In exchange for the annuity owner’s money, the insurance company makes contractual promises, such as guaranteeing an income the owner can’t outlive. In our case here, a fixed index annuity is also rich with other guarantees: guaranteed protection of your principal, minimum guarantees relating to the annuity’s growth potential, and more.

How could this annuity grow in value? A fixed index annuity has an underlying benchmark index, such as the S&P 500 price index. When the index goes up in value, your money in the annuity can earn interest, which is based on a portion of the gain. When the index goes down in value, your money earns zero percent. The current value of your money is locked in, and your money is protected from index losses.

The index performance is tracked and any interest credited over a certain timespan, such as one year. When the time period is passed, there is a “reset,” and the current value of the index is used as a new starting point.

In exchange for the protection against market losses, the growth potential of a fixed index annuity is limited by caps, participation rates, and spreads. It’s the trade-off for having that safeguard. You also don’t have as much liquidity in an annuity as you do with other financial products, and that is also a trade-off for the guaranteed benefits that you receive.

A Quick Rundown on Bank Products

Of course, we are talking about how a fixed index annuity gives you a chance to beat the bank. So, what about bank products? Bank products are typically insured by the FDIC, so that product owners are protected up to a certain amount.

Savings Accounts

Most people are familiar with a traditional savings account. It’s a bank account in which people can deposit money and earn interest on their savings. A savings account is intended as a low-risk place to keep your money. That being said, the interest rate is usually quite low. Savings account funds are very liquid, and the account may come with a minimum balance requirement so that you don’t pay any fees.

Money Market Accounts

A money market account is a kind of savings account offered by a bank. It combines the features of a traditional savings account and a checking account. Money market accounts typically offer higher interest rates than regular savings accounts.

They also provide relatively easy access to your money, but there may be limits on the number of monthly transactions you can make. Your money market account may also come with a check-writing ability, albeit to a fault. Again, the money market account is intended as a low-risk savings vehicle.

High Yield Checking and Savings Accounts

High-yield checking and savings accounts are like traditional checking and savings accounts, but they usually come with higher interest rates. With the high-yield savings account, you will usually have a minimum account balance to maintain in exchange for the higher interest rate. The minimum account balance requirement can be fairly high depending on your bank.

For the high-yield checking account, you have checking transactions. You may face requirements such as a certain amount of monthly debit card transactions, direct deposit, and online banking usage in order to qualify for the higher interest rate.

These accounts do offer liquidity, but typically not as much as traditional bank account products. That is a trade-off for the higher interest rate for your money.

Bank CDs

A bank certificate of deposit is also known as a bank CD. It’s a low risk investment, in which someone agrees to keep a certain amount of money deposited over time, in exchange for a set interest rate. That span of time is called a maturity or term, and it can range from a few months to several years. Bank CDs generally pay more interest than regular savings accounts.

The liquidity in a bank CD is very limited. You also don’t have as much flexibility as you do with other bank products. The earnings on a bank CD are taxable as ordinary income (as are annuities, to be clear). Like with other bank products, CDs come with a minimum required deposit to be met.

How Do Fixed Index Annuities Earn More Interest?

The answer is in the fixed index annuity’s unique ability to earn interest. The annuity’s growth potential isn’t guaranteed, unlike what you get with bank products and guaranteed rates. However, over time, the annuity’s gains tend to exceed what the bank pays you, as the underlying index has good years (and bad years).

The “reset” feature for the fixed index annuity is also crucial. Again, your principal and credited gains are locked in each period. What’s more, the index’s current value is the new starting point for calculating interest. Your gains in a fixed index annuity can snowball more over time due to the reset feature.

Historically, fixed index annuities were designed to beat bank products and give retirees and pre-retirement savers an alternative with higher rates. And they have done just that. In fact, it’s not unusual for a fixed index annuity to be at a traditional fixed-rate annuity over time, and that is even with the annuity’s rate being guaranteed.

Is a Fixed Index Annuity or a Bank Product Right for You?

By asking the right questions and determining what is most important to you. Here are a few things to keep in mind:

• Bank products have FDIC coverage while annuities have backing of strict state-regulated reserves, reinsurance, and other safeguards at the state level. If you worry about ironclad protection, you might go with a bank product as it’s backed by the U.S. government.
• Compare the interest rates offered by bank products and fixed-rate annuities. Want more growth potential than what they pay? A fixed index annuity may indeed be right for you.
• If you need liquidity for your money, a fixed index annuity does allow some limited withdrawals, but doesn’t have the same liquidity as many bank products do.
• If you want guarantees for your retirement money and the peace of mind that they bring, an annuity (and perhaps a fixed index annuity) will certainly be of interest to you.
• If you plan to live off the money in your low-risk investment for retirement, an annuity is also worth a look if you are concerned about running out of money.

These points are to help you get started. If you are still wondering about what products make sense for the fixed-income or fixed-interest part of your retirement assets, consider talking to a financial professional.

The right financial guide will be someone who is experienced, independent, and knowledgeable about retirement. They should be able to help you build a customized retirement financial plan as they have for other clients. That includes looking at the mix of investments and savings vehicles, all working together, that makes sense for your situation.

Looking for a financial expert to assist you? You can connect with someone in our “Find a Financial Professional” section, where many independent and experienced financial professionals are available. Don’t hesitate to request a complimentary initial appointment and discuss your goals, concerns, and situation. If you need a personal referral, call us at 877.476.9723.

The post How Do Fixed Index Annuities Let You Beat the Bank? first appeared on SafeMoney.com.

Fixed indexed annuities are a tool for building up retirement savings on a tax-advantaged basis. They are becoming more popular for many retirement savers, as they let your money grow by earning interest, protect your principal against losses, and offer a guaranteed income stream in retirement.

If you are thinking about this retirement-saving option, one key aspect is understanding fixed index annuity crediting methods. These are the means by which your annuity money can earn interest.

A fixed indexed annuity usually has a fixed option that will pay a guaranteed rate for a certain timespan. However, indexed annuity crediting methods aren’t guaranteed, but they generally offer growth potential above the fixed option. You can also have more growth potential with a fixed index annuity than other types of fixed annuities.

In this article, we will go over the different types of crediting methods, their components, and how these crediting methods work. These annuity crediting methods are linked to underlying index benchmarks. Those benchmarks can be everyday financial indices that you know (the S&P 500 price index) or niche indices that focus on domestic, foreign, or different asset classes.

Indexed Annuity Crediting Method Components

Before diving into the crediting methods, it’s good to know their core parts. Life insurance companies build out their indexed annuity crediting methods on three components:

• Caps
• Participation rates
• Spreads

Caps are absolute limits imposed on how much your money can grow in a fixed indexed annuity within a given period. For example, say that a fixed index annuity has a cap of 10% and the timespan is for one year.

That means that the most that the annuity can earn in that year is 10%, regardless of how much higher the underlying index goes. This limit can be noticeable in years when the benchmark index has high growth, such as 25%.

Participation rates are another way to limit the growth that someone can reap within a given crediting period. A participation rate of 60% means that you will get 60% of the growth of the underlying benchmark index, regardless of how much it grows.

This crediting method can result in higher overall growth in the contract over time than one with a cap rate. Some fixed index annuities allow you to choose an enhanced participation rate in the form of riders. However, these are also available for a fee or charge.

The third way that insurance carriers can limit the amount of growth in a fixed indexed annuity is with a spread. The spread would apply for a crediting period, such as for a year.

Let’s say that the spread is 2% and the index goes up by 10% for the year. In that case, the insurance company would take 2% off that 10% growth. This can be a nice feature when the benchmark index has a big gain for the year.

For example, if the index rises by 15% during a given crediting period, then the 2% spread would be minimal compared to that increase. This doesn’t necessarily happen often but can be a nice option to have when index growth is high.

Why Do Crediting Methods Have Limits on Growth?

Why your growth potential is capped is for a variety of reasons. First, your fixed indexed annuity provides principal protection, meaning that your principal and prior interest earnings are protected from losses. The limited growth potential is a trade-off benefit for that.

It also helps the life insurance company offer reasonable growth for your money, remain in business, and keep its promises to you and many other contract holders. Finally, the growth potential is strongly tied to the options budget that the insurance company has for its fixed index annuity contracts.

Ninety to ninety-five cents of every dollar of indexed annuity premium are put into conservative, low-risk investments like bonds. On the other hand, three to five cents of every dollar go toward call options on the indices that you choose (which you can choose in different crediting methods, more on that later).

More on Crediting Methods in Up and Down Periods

Each crediting method is tied to an underlying benchmark index. However, no crediting method is ever a direct investment in investment markets. A crediting method is simply a way for your annuity money to earn interest.

In years of positive index returns, your money may earn interest depending on the amount of growth and the crediting method chosen. The growth potential for your money is generally above that of a fixed annuity or other fixed-interest investments, such as bonds, CDs, Treasury securities, and so on.

In those years when the index goes down or stays flat, your money is protected. Your contract is simply credited zero percent, so your money won’t go down due to negative index returns (unless you opt for a rider in the contract that can do things like pay guaranteed income for life).

Common Examples of Different Crediting Methods

– Annual point-to-point

This crediting method is fairly straightforward. It simply compares the difference between where the underlying benchmark index is at the beginning of the contract year and where it lands at year end.

For example, say that you buy an indexed annuity and choose one benchmark index, such as the S&P 500 price index. The insurance company will look at the value of this index on the date that you started your annuity and then compare it to where the index is exactly one year later.

So, if your annuity contract started on September 1, 2021, then the carrier will look at the index value on September 1st of 2022. If the index is higher by that time than it was the year before, then the insurance company will credit your contract with a proportionate amount of interest.

However, if the index fell in value over the year, no interest would be credited. But the value of your annuity wouldn’t decline because your principal is protected.

Let’s say hypothetically that an index did rise in value over the past year. The index was hypothetically at 280 on September 1, 2021. Assume for the purpose of this example that the index closed at 294 on September 1, 2022. Your interest would be calculated as follows:

294/280 -1 = 0.05

Cap rate = 6%

Amount of growth credited to your annuity = 5%

– Biannual point-to-point

This is the same as the previous example, except that a two-year period is used. Biannual point-to-point strategies have often slightly outperformed annual strategies over time. This is because the insurance company can invest your money in underlying investments with a longer maturity and thus earn a higher yield.

– Triannual point-to-point

Again, this is the same concept as the annual strategy, except that a three-year period is used. As with the biannual strategy, you will most likely get a higher rate of return with this strategy because the insurance company can invest in instruments with longer maturities.  

– Participation rate

This form of crediting uses a percentage of the index’s growth for its crediting formula. Let’s assume again that your contract start date was September 1, 2021 and the index was at 280. On September 1, 2022, the index closed at 294. Let’s also say that the participation rate is set at 65% of the index growth.

If you chose the participation rate, your interest earnings would be based on 65% of the index gain. So, your interest would be calculated as follows:

Index growth = 5% (0.05)

Participation rate = 65% (0.65)
0.05 X 0.65 = 3.25% interest credited to your annuity balance

– Monthly sum

This crediting method is a bit more complicated than the previous methods. The monthly sum method accounts for all the capped cumulative monthly changes in the index during the preceding year.

When the index rises in value in a given month, the amount of growth that is plugged into the crediting formula is capped at a certain amount. The “floor” or principal guarantee doesn’t apply when the index drops in value in a given month.

Following is an example of how your interest would be calculated based on the previous examples. Assume that the monthly cap rate is 1.5%.

Now, we total all those percentages to determine the amount of interest that you will earn for the year. The total comes out to -1% in this case, which means that you won’t earn any interest for this year.

In this case, you can see where one of the other crediting methods listed would have been more profitable for you than this one.

Which Indexed Annuity Crediting Method Is Best?

Over the long term, no crediting method is typically the “best” or works better than its counterparts. In the short term, some crediting method options may do better.

Instead, you may want to look for fixed indexed annuity contracts that have straightforward crediting methods and index options. That can make it easier to keep comparing different annuities.

Even so, some companies that offer “simple” crediting methods generally use a somewhat complex formula to calculate the exact amount of interest that they owe you. The examples above have been simplified to show you the basic concepts.

You can also ask your financial professional about a specific insurance company’s history with ‘renewal rates,’ or the rates for growth potential that the insurer offers after a contract year has passed. Not all life insurance companies are generous in this area. Some also publish their renewal histories publicly.

All insurance companies also have minimum rates for participation rates, caps, and spreads. Their histories of what those are set at can be a clue-in of how an insurance company might be for future growth potential for your money.

Don’t Buy for Annuity Crediting Methods Alone

It’s good to keep this in mind: annuities don’t offer the strongest benefit for their growth potential.

Their biggest advantage is the contractual guarantees which they offer you in retirement. Guaranteed income for life, guaranteed protection against index losses. For fixed-type annuities and the fixed option on indexed annuities, guaranteed growth. Some fixed indexed annuities also come with death benefit guarantees.

If you are looking for guaranteed benefits in retirement, these are perhaps the biggest areas to focus on. It’s good to buy an annuity for what it will do for you, not only what it might. Ask your financial professional about what sort of contractual guarantees may be available on the fixed indexed annuity products which you might be exploring.

Other questions that you can ask your financial professional include the level of diversification that you get from a given index. If you choose to use the S&P 500 Index, then you have wide diversification.

Other common indexes that are used are tech stock indexes and Nasdaq indexes. Some benchmark indices track separate asset classes, such as stocks, commodities, and bonds.

Remember, you can usually divide your money between several indices if you like; you generally don’t have to put all your money into just one index. You can also have more than one crediting period, such as half in an annual point-to-point and half in a two or three-year point-to-point.

It is also good to find out how long a given financial index that your advisor recommends has been around. With the explosion of new fixed index annuity products that have flooded the marketplace, many new indices have been created based on consumer demand. But these new indices have no historical track record except from backdated historical data-which is not always a clear indicator of future performance.

Are you looking for a financial professional to help you with understanding your options here? Perhaps you have a broader need, such as wanting someone to look at your existing retirement strategy or come up with a plan for your financial future.

For convenience’s sake, many experienced and independent financial professionals are available at SafeMoney.com. Get started by visiting our “Find a Financial Professional” section, where you can connect with someone directly. You can request an initial appointment or call to discuss your situation. Should you need a personal referral, please call us at 877.476.9723.

The post Index Annuity Crediting Methods — What You Should Know first appeared on SafeMoney.com.

Of course, all of this can change at any time. It’s good to consider your interest rate environment, inflation, and other economic issues when considering an annuity.

In volatile markets, retirees and those close to retirement worry about the sequence of returns risk. Sequence risk arises out of the timing of losses. Losses late in one’s investment life, particularly near retirement, are challenging to recoup because of the short time window available. A loss that might be serious at 35 can be catastrophic at 55.

When you are building your nest egg, you have time to recoup from losses. That time may be shorter or longer, depending on your age, but it’s there, and you can recover. On the other hand, when you are actually living off those same assets, a bad return or loss can have a severe impact on your lifestyle. Moreover, since you are likely in a far more conservative asset allocation strategy, your ability to recover from the loss is more limited. 

Markets can take huge up or down swings at any time – or simply fluctuate in a small range. Those facing disastrous sequence losses when a market veers rapidly down wonder if there is a way to participate in market gains without facing the full fury of potential market losses.

In these conditions, retirees are looking for a place to obtain some growth but not face the risk of losses in the stock market. They want to be able to participate in some market gains, but not be fully exposed to the risks of actually being in the market.  One place to achieve that goal is in the fixed index annuity, or FIA.

What is a Fixed Index Annuity?

A fixed index annuity allows someone to protect their principal while enjoying growth potential tied to a benchmark index’s gains. At its most basic, an FIA is a fixed annuity tied to a specific market index. That index may be a well-known market index, like the ones we hear about daily, or a specially created index linked to a particular market segment.

When someone opts for an FIA, they own an insurance product that can eventually produce a guaranteed income stream. A fixed annuity comes with a specific guaranteed rate of return which may increase slightly, depending on the annuity’s terms, but essentially receives a fixed rate for the length of the annuity.

A variable annuity allows an investor to place all or part of their assets into the equivalent of mutual funds, allowing for asset growth but taking on risk of market losses.

The Balance Between Growth and Protection

A fixed index annuity offers a balance between each of these, and no one has lost money in an FIA due to index losses during a market downturn. 

In the typical fixed index annuity, the contract holder may opt for a guaranteed interest rate similar to that of a fixed annuity. However, they may also opt for another option, in which they receive a portion of the gains of the benchmark index to which the annuity is linked. In that case, the growth isn’t guaranteed, but may be higher than what guaranteed rates would be.

As a simple example, if an annuity is tied to the Acme Index, which gains 10 percent in the first year of the annuity, the annuity owner will see growth that reflects a portion of that 10 percent.

On the other hand, if the Acme Index goes down 10 percent, the basic guaranteed rate stays the same. For most fixed index annuities, this guaranteed rate will be zero percent – or a floor of protection for your principal and interest earnings.

How Does Your Money Grow and Stay Protected?

The interest credited is only a portion of the index’s gains because of caps and participation rates. In return for the protection offered from market losses, the annuity purchaser only receives a part of the designated index’s gain.

The participation rate refers to what percentage of the gains that someone will receive. Thus, if Acme goes up 10 percent and you hold an Acme FIA with a 50 percent participation rate, you will receive a rate of 5 percent.

A cap, in contrast, says that no matter how high Acme goes, you won’t receive growth potential that is higher than a set level. Say that the fixed index annuity has a 9 percent cap. In other words, whether Acme goes up 10 percent or 20 percent, your maximum interest earnings will be the 9 percent cap on your money growth.

Much More Than Just Safe Growth Opportunities

There are several important things to remember about any annuity, however. First, they are insurance products, not investments. There is usually a death benefit, and in retirement, you are probably actually looking for that income stream.

The thing to remember about the guaranteed income stream is that the guarantee isn’t a government guarantee like SIPC for stocks or FDIC for banks. It’s a guarantee based on the claims-paying ability of the issuing insurance company. Life insurance companies have a strong record of upholding their promises.

Historically, insurance company failures have been much less frequent than bank failures. Just do your diligence when shopping for your fixed index annuity. With the right due diligence and careful shopping around, you can find the right balance of growth potential and protection for your financial well-being, now and for years to come.

Are you looking for a financial professional to help you in this search, or to help you other crucial retirement ‘what-ifs?’ No sweat, many independent and experienced financial professionals are available at SafeMoney.com to serve you. Get started by using our “Find a Financial Professional” section to connect with someone directly. Should you need a personal referral, please call us at 877.476.9723.

The post Lock In Your Gains with Fixed Index Annuities and Protect Against Market Losses first appeared on SafeMoney.com.

The annuity owner can determine when the annuity begins to pay out, and how the payouts occur. The payouts can occur for a fixed period of time, or they can be set up to pay out for the remainder of the contract holder’s life.

Done? Not yet. The financial professional offering you the annuity might suggest a series of additional benefits, called “riders,” which can be attached to your annuity. A rider can offer add-on benefits to your base contract. It can make the decision-making process even more involved.

Here are some of the types of riders you might find on a fixed index annuity. We will also answer some of the questions that can arise when you explore these riders.

Guaranteed Withdrawal Benefit

One key consideration to an annuity is how you might receive an income stream from the annuity contract, but still retain some liquidity. While annuitization, or converting your annuity money into an irreversible stream of payments, secures a guaranteed income source, you give up all access to your money.

One alternative, an annuity income rider can offer a balance between income and access. An income rider is often known as a guaranteed withdrawal benefit. Life insurance companies use names such as “guaranteed lifetime withdrawal benefit” or “guaranteed minimum withdrawal benefit” in their annuity products.

A guaranteed withdrawal benefit guarantees that someone will receive payments until death, often for a rider cost (but not always). These payments will keep going even if the annuity money goes to zero. What’s more, the annuity can continue to earn interest.

The annuity owner can stop and restart payments at any time, thus offering more freedom of choice than a pension. If the contract holder also needs some liquidity, they can take free withdrawals of up to a certain percentage from their annuity money.

On the other hand, free withdrawals can affect the payments that you receive with the guaranteed withdrawal benefit, as a trade-off. It’s good to keep that in mind if you choose to tap into your fixed index annuity for liquidity.  

Lifetime Income Benefit Rider

A lifetime income benefit rider is another name for an income rider. This is similar to how an income rider can be called a guaranteed withdrawal benefit.

This rider guarantees a set regular income payment from the annuity, which can be designated to start at some time in the future, and can be paid out monthly, quarterly, or annually. The guarantee here is that the payments will continue until death, even if the principal is exhausted before that happens.

This can help as a strong defense against the danger of running out of money in retirement. Why might someone not want an income rider attached to their annuity? There are often rider fees, which usually cost around one percent.

It may also be a negative if you are looking to your annuity primarily for growth. In exchange for the lifetime income benefit, your annuity may have lower rates on it, limiting your money’s growth potential compared to what other annuities can offer. This enables the insurance company to be able to pay for the extended period payouts.

Death Benefit Rider

You might also consider certain add-on benefits for estate planning purposes. Yes, it’s possible for an annuity to pay a guaranteed income for the life of the owner. Additionally, a death benefit rider can be attached to the contract so that a final payment is made when the annuity owner passes away.

A death benefit rider allows for the owner’s heirs to receive at least the amount of principal premium paid for the annuity – a kind of return of premium. There is also a death benefit rider that allows for a multiplier on the contract value in case the owner passes away early. Some contracts with this rider benefit require for some years to have passed initially before it might apply.

It’s also possible to purchase a living benefit to heirs, transferring the annuity assets to a surviving family member.

As stated above, there are many choices. The cost is usually a percentage of the principal, paid on an annual basis. 

Long-Term Care Rider

Think hard about this opportunity. Long-term care insurance is difficult to purchase these days, especially with underwriting, and is very expensive.

But people are living longer in the 21st century, although not always in a condition where they can care for themselves. Long-term care for a loved one can put a family into severe financial straits.

A long-term care rider allows for an annuity payout to be adjusted so that the annual payout can help cover the cost of long-term care. This rider usually covers a short period of time, such as three or five years. But it allows you and your family to have the funds they need to pay for the long-term care.

This rider is a good idea for someone who has a family history of living a long time, even in the case of advanced mental or physical disability.

However, riders differ based on contract details. Some contracts return to the original payout amount after the maximum allowable period for the long-term care withdrawals has passed (the suggested three or five years stated above). On the other hand, some contracts stop payments altogether if the original contract value has reached zero.

These details are often complex and need to be discussed with a financial professional before agreeing to any terms.

Cost of Living (COLA) Rider

Cost of living adjustment (COLA) riders aren’t exactly the most popular subject in town.

Nevertheless, with shocks to the economy by supply-chain and geopolitical changes, inflation has once again raised its ugly head. The cost of living is increasing, and thus, the need for a COLA rider.

An annuity contract calls for a guaranteed and specified monthly income. For a fixed index annuity, that income amount is typically the same every month. A COLA rider allows that amount to be increased based on a particular measure of inflation.

A caution: the company issuing the annuity gets to determine the inflation measure used. It might not be the best measure of current monetary value.

Some annuities allow for a fixed, annual percentage COLA increase rather than an annual determination of current inflation rates. Others allow for adjusting income depending on the fixed index annuity’s interest earnings, which vary and aren’t guaranteed.

In other cases, the income payout may be lower, in early years, on a COLA rider than if you went with a plain-vanilla annuity payout that doesn’t have increasing income. If that is so, it may be a number of years before the increasing income option catches up with this plain-vanilla level income option. Ask your financial professional to explain this in depth.

If you are looking at this option, ask your financial professional about the fine details of any rider benefits that you might tap to combat inflation. Don’t be afraid to ask any questions about something you don’t understand, and don’t feel pressured to move forward without understanding your options. This is your life savings, after all.

Some Final Food for Thought

This article only touches on some of the finer points of attaching a rider to a fixed index annuity contract. There are several other choices to be made.

Your options regarding an annuity should be discussed with your financial professional, who should be experienced and understand your personal situation well. If tax questions or other questions about your situation arise, bring in your tax advisor and other relevant professionals for personal guidance.

As you consider different rider options with any fixed index annuity you are exploring, it helps to keep these questions in mind:

• How is this annuity rider benefit solving a problem in my financial situation?
• Do I understand this fixed index annuity rider as well as its pros and cons?
• What am I giving up elsewhere in my annuity by opting for this rider?
• What does the rider cost all-in?
• What will be the cost of choosing not to go with that fixed index annuity rider benefit?
• Am I counting on this one annuity to cover too many potential issues in my retirement plan where it might fall short? (ex: lifetime income, long-term care, so on)

Like with any financial decision, you are putting money toward something that you hope will provide financial benefit to you for years to come. You want to make certain you are making the correct decision for your needs.

Expert, Independent Guidance Can Make a Difference

It could be unwise to attempt to make those decisions yourself, unless you have a financial advisor or agent who understands these products and the issues they solve well.

If you are looking for a financial professional to help with these what-ifs, or give a second opinion, then no sweat. Many independent and experienced financial professionals are available at SafeMoney.com to assist you.

You can get started by visiting our “Find a Financial Professional” section, where you can connect with someone directly. Please feel free to request a phone meeting or initial appointment to discuss your goals, situation, and explore a potential working relationship. Should you need a personal referral, please call us at 877.476.9723.

The post Fixed Index Annuity Riders — What You Should Know About Them first appeared on SafeMoney.com.

Nothing is perfect for every financial situation or contingency. Fixed index annuities are no exception in that regard. Rather, a strategic mix of financial vehicles and strategies will help create a balanced, personal retirement plan that fits your needs and situation.

A fixed index annuity can give your plan a strong foundation with its contractual guarantees. Your money can grow more in an indexed annuity than it might in other fixed-type annuities with guaranteed rates. However, this kind of annuity has some areas where it’s not as strong as other annuities or financial vehicles are.

What Is a Fixed Index Annuity?

Like other annuities, a fixed indexed annuity is a contract with a life insurance company. As the “fixed” in its name suggests, the indexed annuity protects your money and interest earnings against market risk.

A fixed index annuity can potentially earn more interest than a traditional fixed annuity or a multi-year guarantee annuity. The fixed indexed annuity is tied to an underlying benchmark index. A commonly used benchmark is the S&P 500 price index.

When the underlying index goes up, your contract earns interest that is based on a portion of that index increase. When the index goes down, your existing contract value stays the same. You effectively earn “zero” for that period instead of negative interest being credited to your contract.

In exchange for this protection against index losses, the growth potential of your fixed index annuity does have some limits. How much interest your money earns is determined by caps, participation rates, and spreads, so the growth isn’t “unlimited” or even meant to compete at the same level with equity market returns (despite some annuity ads promising you just that).

What Are the Pros and Cons of a Fixed Index Annuity?

If you are thinking about different annuity options, here are some fixed index annuity pros and cons to remember as you weigh your choices. Some quick ones are below.

Pros of a Fixed Index Annuity:

• Strong protection of principal – backed by sturdy, state-regulated life insurance companies
• Growth potential based on a linked benchmark index, like the S&P 500 price index
• Money grows tax-deferred while inside the annuity
• Can earn more interest than other fixed-type annuities, bonds, CDs, and other fixed-interest vehicles
• Helps contract holders avoid market risk
• Most fixed index annuities don’t have fees or expenses
• Can give guaranteed lifetime income and other contractual guarantees for people’s unique situations
• Have some liquidity with flexible withdrawals
• Provide death benefit to heirs if someone passes away without using all the money in the contract
• Can bypass probate and its costs
• No IRS code limits on how much money you can put into an annuity, unlike with 401(k) plans and IRAs

Cons of a Fixed Index Annuity:

• Taking money out before age 59.5 incurs a 10% IRS early withdrawal penalty
• Surrender charges for withdrawals in excess of free withdrawal amount or when contract is ended before maturity
• The money taken out is taxed at ordinary income tax rates
• Money in an annuity received by beneficiaries is generally taxable
• Don’t have coverage by the FDIC or NCUA
• With principal protection, interest-earning potential can be limited
• Not as much growth potential as variable annuities, stocks, or other market-based investments
• Can have years of zero interest earnings when benchmark index is down
• In times when the annuity earns zero percent, possible for surrender charges or add-on rider benefit fees to offset zero credited interest
• Participation rates, caps, spreads, and other factors used to calculate interest earnings can change annually
• Some indexed annuities or rider benefits come with fees, but many indexed annuities don’t

Now, what are some advantages and disadvantages of a fixed index annuity that it’s good to understand? Let’s do a deep dive into some of the more involved “for’s” and “against’s” with this type of annuity product.

Pro #1: Earn More Interest Than Elsewhere

Fixed index annuities are designed to let you earn more interest than you might with a CD, a traditional fixed annuity, or even bonds.

Historically, fixed index annuities have seen more growth potential than these other assets. If you want growth for your money that is more than what the bank offers, but still have some protection, this sort of annuity might be what you are looking for.

Pro #2: Zero Is the Hero

When the underlying index drops in value, you earn zero interest for that period. Your principal and already-earned interest money remains intact.

You continue to benefit from this, too. Fixed index annuities have a variety of “crediting strategies,” or ways that your money can earn interest. Your annuity will have certain features that reset monthly, annually, or possibly over a longer period, depending on the crediting strategies that you choose.

Pro #3: Guaranteed Lifetime Income

Like all other types of annuities, fixed index annuities can pay you a guaranteed income stream. This guaranteed income can be received for a certain period or for life.

What is also nice is a fixed index annuity can give you some flexibility in how you receive these payments. Many contracts come with income riders that can you let turn the payments off and on when you need the income. They may also come with a fee, so be sure to ask for any details if you are considering options with this add-on benefit.

Pro #4: Tax-Advantaged Growth

Fixed index annuities also provide a tax benefit for growing your retirement money. They can provide tax-deferred growth for helping you accumulate more retirement savings.  The premiums that you pay into your contract aren’t deductible, but there is no limit to the amount of money that can be placed inside a contract.

This money is tax-deferred as long as it’s inside the annuity. On the backend, your withdrawals will be taxed as ordinary income.

Pro #5: Relatively Low or No Fees

Fixed indexed annuities don’t have management fees or, for that matter, other investment-based fees that you find in variable annuities.

Fees are built into the contract design with how the insurer can limit your growth potential. However, you also enjoy principal protection in the times of index losses as well. Some contracts do have fees or expenses, but most indexed annuity contracts don’t.

Let your financial professional know if this is an important factor for you in your annuity buying decisions.

Con #1: Moving Parts

Fixed indexed annuities can have lots of moving parts, from how they earn interest to the lifetime income they pay out and how all of this might be calculated by the insurer.

Make sure you find a financial professional who knows their annuity contracts, who acts in your best interest, and who can walk through everything before you make a decision.

Con #2: Not Designed for Market Returns

Fixed indexed annuities aren’t designed to compete with the market. Generally, they are meant as vehicles with growth potential that might be superior to many fixed-income asset types.

The interest you earn from an underlying index doesn’t include dividends. However, since fixed index annuities aren’t a direct investment in the market, this is hardly an actual factor anyway.

Cons #3: Payout Calculations Can Be Tricky

How the insurer calculates payouts to you can be fairly involved. For one, there is an annuity “income value.” This is the internal number that the insurance company’s actuaries use for payout calculations to you.

Just this part alone can be complex. Make sure you understand how this feature might work in any fixed index annuity contracts you are exploring.

Con #4: Some Liquidity Available

Fixed index annuities have liquidity, but it’s limited. Like other annuities, fixed indexed contracts do have some provisions for liquidity.

However, they also come with early withdrawal penalties and surrender charges if you take out too much money too early.

Con #5: Some Contracts and Riders Have Fees

As stated earlier, some fixed indexed annuities come with riders or add-on features that have additional fees or charges.

Some contracts also have fees for base features, although this is quite rare. This question of fees isn’t prevalent among fixed index annuities overall, but it does vary from one insurance company to another and from contract to contract. To be sure, it’s good to have a clear idea of how much your fixed indexed annuity might cost you.

How Do You Find the Right Annuity for You?

Work with an experienced, independent financial professional to explore your options. They can help you to determine whether an annuity makes sense – and which one will be best for you going forward.

By working with an independent financial representative, you can have access to annuity products from many life insurance companies. This also gives your financial professional much more leeway in the solutions that they can shop around for and offer you.

They also tend to have broader product knowledge, and that can help in finding the right indexed annuity for your situation (if it makes sense for you).

Different Contracts for Different Situations

At the very least, remember this. Like other types of annuities, different fixed index annuity contracts are built for different needs. Some indexed annuities are designed primarily to provide long-term growth potential. Meanwhile, others are geared to provide a superior stream of income over time.

Your financial professional will discuss your situation with you in depth, understand your needs, and help you find competitive ones based on what fits your circumstances.

Need Someone to Help You?

What if you are looking for a financial professional to guide you in this process? No sweat. Many independent practitioners are available at SafeMoney.com to assist you.

Get started with our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to go over your questions and explore a working relationship. Should you need a personal referral, call us at 877.476.9723.

The post Fixed Index Annuity Pros and Cons first appeared on SafeMoney.com.

What can you do now to preserve the money you have accumulated and grown for so many years? The answer will be different for every person. It depends largely on their situation, risk tolerance, need for liquidity, and goals.

But one proven solution is a fixed index annuity. Backed by the protection of sturdy, long-time insurance companies, fixed index annuities are a place where you can park your can’t-afford-to-lose money and sit tight.

A Great History of Protecting People’s Money

Life insurance companies have a great track record of protecting their policyholders’ money. They must maintain, at minimum, dollar-for-dollar reserves for every dollar of annuity premium they bring in.

Life insurers are also regulated on the types of investments they can use for supporting their annuity policies. For fixed annuity insurer risk pools, the bulk of dollars go into Treasury securities, high-quality corporate bonds, and other low-risk fixed-income assets.

Insurance companies also are subject to creditor ratings. They have those published on a regular basis by very reputable ratings agencies such as A.M. Best and Moody’s.

Think about it. Did you ever ask your local stockbroker what his creditor rating is? Or ask the advisor at the local branch of your bank? How about at the local office of a massive investment services company?

This isn’t a knock against stocks or market-based funds. After all, every asset class can have a place and role in someone’s portfolio. But it helps point out a key difference among life insurance companies, investment companies, and other financial institutions.

Insurance companies are judged by their ability to manage risk. From 1982 to 2010, only 291 out of thousands of health and life insurance companies failed.

In other words, they got to a point where state insurance regulators had to step in and take over the company’s claims to make good on their insured promises to policyholders.

How a Fixed Index Annuity Can Benefit You

Now, what about you as an individual retirement saver? A fixed index annuity allows you to protect your principal against index losses while enjoying some growth potential for your money. This growth will be tied to an underlying financial benchmark.

For many indexed annuities, this benchmark is the S&P 500 price index. But most fixed indexed contracts today usually have several different benchmark indices to choose from.

Note the index doesn’t include dividends. This is an insurance contract, not an investment.

When the underlying index goes up, your annuity money earns interest based on a proportional percentage of that increase. When the index goes down, the least you can earn is zero percent.

Zero is your hero. Your money doesn’t lose value due to the underlying index dropping. The insurance company simply credits you nothing for that time period. 

How Do Fixed Index Annuities Work?

You can’t lose the interest money you earned in a prior crediting period if the index declines in a subsequent period. Once interest has been credited, it’s locked in permanently, regardless of how the index performs from then on.

However, in exchange for this protection against index losses, the life insurance company limits the growth potential of your money.

Caps, participation rates, and spreads are the levers at the insurer’s disposal for this. This helps the insurance company manage the risks of its promises to you, including shouldering the risk of investment loss.

More on Caps and Participation Rates

Caps limit the amount of growth that you can earn to an absolute percentage, such as 5 percent.

So if the underlying benchmark index rises by 25% during a given crediting period, then you will only earn the maximum of 5% for that period. The insurance carrier keeps the remainder of the growth.

Participation rates have no absolute limit, but you only earn a percentage of all of the growth in the index from day one.

For example, if the participation rate is 70%, then you will be credited with 70% of the growth of the index during that period. So if the index rises by 10% during the crediting period, you will be credited with 7% of the growth. (10% X 70%).

Spreads are simply a charge that would be deducted from the growth. So, if the index grew 10% during that period and the spread was 2%, your money would earn 8% interest for that crediting period.

How Much Could Your Money Grow?

Historically, fixed index annuities have had more growth potential than bonds, CDs, and other fixed-income assets.

With traditional fixed annuities, insurance companies often pay you 20-30% more interest than what the bank might give you in its products. This is quite a nice alternative.

A fixed indexed annuity is designed to have more growth potential than a fixed annuity. Some of the most competitive index annuity contracts in the insurance market have earned 3 to 6 percent interest over the long term.

However, the growth potential will depend largely on your specific index annuity, its contract design, and what interest rates are at in the larger financial market.

Some fixed index annuities are built to pay out more lifetime income than other contracts. Meanwhile, others are built for accumulation above the growth potential of fixed-interest instruments.

Ask your financial advisor or agent what the purpose is for any index annuity contracts you are considering. Matching the right solution to your specific needs is what is most important.

Can You Lose Money with a Fixed Index Annuity?

One of the few ways that you can possibly lose money in a fixed indexed annuity is to make a withdrawal from the contract that exceeds the free withdrawal amount in a given year.

All fixed indexed annuities come with a backend surrender charge schedule. This helps the insurance company prevent “runs” on annuity policies so it can maintain its strong guaranteed promises to you, the policyholder.

Some surrender periods stretch out as long as 15 years. But not all, as some contracts have much shorter surrender periods.

Also, most fixed indexed contracts will also allow you to take out a certain amount without penalty each year. Usually this is as much as 5 or 10 percent of the contract value.

But if you withdraw more than that amount in a given year, you may face surrender charge penalties on the excess amount withdrawn. However, once the surrender charge schedule has expired, the annuity is liquid and can be cashed in without further penalty.

Keep in mind that ordinary income taxes can apply to your withdrawals and potentially a cash out.

See How You Can Protect Your Money

Fixed indexed annuities are one of the newer types of annuities in the marketplace. After all, they have “only” been available for about the past 25 years.

Annuities have been around since the days of the Roman Empire. But fixed index annuities are rapidly becoming the most popular type of annuity because of safety of principal and their ability to earn fairly competitive interest.

Consult your financial professional for more information about fixed indexed annuities and how they can help protect your money. What if you are looking for a financial professional to help you? No sweat.

Many financial professionals are available at SafeMoney.com to assist you. Use our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss your goals and situation. Should you need a personal referral, call us at 877.476.9723.

The post How Fixed Index Annuities Can Protect Your Money first appeared on SafeMoney.com.

He is Professor Emeritus at Yale School of Management, former chairperson of research firm Ibbotson Associates, and chairman as well as chief investment officer at Zebra Capital Management. Ibbotson is also a prolific author, having conducted financial research on many topics including investment returns, mutual funds, international markets, portfolio management, and valuation.

In past studies, his analysis has been groundbreaking and his principles adopted by financial markets at large. So, it’s not surprising why his research on fixed index annuities has gained such wide attention.

In his latest study, Fixed Indexed Annuities: Consider the Alternative, Ibbotson expands his view of the use of a fixed index annuity (FIA). Here, he defines a fixed index annuity as a tax-deferred retirement savings vehicle that “eliminates downside risk while allowing for the opportunity to participate in upside market returns.”

As baseline benefits, he believes that fixed index annuities, if properly structured, can help control financial market risk and mitigate longevity risk.

What Else can Fixed Index Annuities Offer?

“Given the current low-yield environment, bond returns for the next several years will likely be based entirely on yield. Although the lower risk may be appropriate as we age, the returns may disappoint or be insufficient to maintain necessary income in retirement,” according to his report.

In introducing the study results, he reveals this finding: “My colleagues and I will show that a generic FIA using a large cap equity index in simulation has bond-like risk but with returns tied to positive movements in equities, allowing for equity upside participation. For these reasons, an FIA may be an attractive alternative to consider.”

Index Annuities, a New Option for Retirement Portfolios?

There may be several goals for a retirement plan, but often the primary goal is to provide a steady stream of income that lasts for a retiree’s lifetime.

For many retirees, a common indexed annuity strategy is using the contract for an “income floor.” In other words, a retiree pays for fixed living expenses with the consistent, recurring fixed income stream provided by the FIA. In recent years, fixed index annuity sales have reached new heights in the United States.

Events like these have given fixed index annuities a place of consideration in retirement portfolios nationwide. But, still, financial advisors may view FIAs as an alternative to traditional asset classes, such as stocks and bonds. That is why the weight of Ibbotson’s findings helps expand the view of the potential for index annuity contracts.

“…Too often, we simply accept conventional wisdom, which prevents us from considering other alternatives,” he says in his report’s introduction. “Although it is prudent to de-risk portfolios approaching retirement, are bonds our best option? Can we potentially realize a better result?”

Breakthrough Research Spotlights the Potential

Ibbotson goes on to say: “Recent innovations in annuity product design, combined with an increasingly competitive marketplace, have given individuals preparing for or in retirement powerful and more affordable tools to not only mitigate retirement risks, but also to serve as a vehicle to increase wealth leading up to retirement.”

So, what about Ibbotson’s study outcomes? A recent ThinkAdvisor article describes the findings:

“He [Ibbotson] simulated the performance of $1 invested in an uncapped large-cap equity index FIA compared to the performance of long-term government bonds over the period from 1927 through 2016, net of expenses. He assumed annual expenses of 10 basis points for a passive stock portfolio and 10 basis points for a passive bond portfolio.”

“The hypothetical maximum annualized return for the FIA was 5.81% compared with 9.92% for large-cap stocks and 5.32% for long-term government bonds. The maximum annualized return for a three-year holding period of the FIA was 27.56% versus 30.76% for large cap stocks and 23.3% for long-term government bonds. The minimum annualized three-year return of the FIA was zero compared with a 27% loss for large-cap stocks and 2.32% loss for long-term government bonds.”

“Ibbotson also compared the performance of a 60/40 stock/bond portfolio to that of portfolios with 60% stocks, 20% bonds and 20% FIAs — and 60% stocks 40% FIAs — over the same 1927-2016 period.”

“The average return of the 60/40 stocks/FIA portfolio was 8.77% versus 8.66% for the 60/20/20 stocks/bonds/FIA portfolio and 8.55% for the 60/40 stock/bond portfolio.”

“Ibbotson also simulated the performance of those three portfolios when annualized three-year return for large-caps were flat, down 10%, up 10% and up 20%. The two portfolios incorporating FIAs outperformed the 60/40 stock/bond mix only when stocks had positive three-year annualized returns of 10% and 20%, not when stocks were flat or lower.”

“Ibbotson then overlaid interest rate increases on those four comparisons. He found that when rates rose 1%, 2% or 3% the expected three-year annualized returns of the two portfolios that included FIAs outperformed the 60/40 stock/bond portfolio. They either lost less — when equities fell — or gained more when equities rose by 10% or 20% on a three-year annualized basis.”

While these study findings are insightful, we should also keep in mind that everyone has different needs — and requires different solutions for them. It goes without saying that every portfolio should be structured to suit a client’s unique financial picture and their tolerance for risk.

A New Asset Class to Consider?

Characterizing the findings of his study, Ibbotson says, “In simulation, the FIA performed better net of assumed fees than long term government bonds. We showed the FIA had comparable volatility to bonds but with better downside protection.”

He continues: “In our study, when bonds underperformed, the FIA performed quite well. It is our view, considering today’s low interest rate environment and our modest expectations for bond returns in the coming future, FIAs are an alternative to consider.”

Less Growth, More Risk… Insights from Behavioral Finance

Over their volumes of research, Ibbotson and the team at Zebra Capital Management have noted the impact of “behavior finance” on money matters outcomes. 

Within economics, behavioral finance refers to insights from cognitive psychology that reveal how and why some people make irrational investment decisions. When Zebra applied behavioral finance to the equity markets, their team made two important findings:

• Investors’ irrational decisions may add volatility and risk
• The most popular stocks historically have provided lower returns

Based on its findings, Zebra combined its research methodology with a daily risk control methodology to create a proprietary, large cap, “rules-based index.” 

Ibbotson and company believe that over the last 17 years, “U.S. treasury bills have failed to keep pace with inflation, and large cap U.S. stocks have experienced significant drawdowns, reducing returns. Long-term bonds have been consistent, but today’s interest rates are near historic lows.” The proprietary index, Zebra says, could offer the potential for more stable accrual and more control of volatility.

It’s a noteworthy claim, given how Ibbotson has observed bad financial decisions affect various retirement outcomes, such as reduced money growth and elevated portfolio volatility.

Takeaway: All Options on the Table

Perhaps the most important takeaway from Ibbotson’s analysis is the need to look beyond the norm when planning for income, risk protection, and asset growth potential.

By working in tandem with their financial professional, people can evaluate their personal preferences, their unique retirement planning profiles, and their goals. Then they can consider the complete range of options to help them meet their objectives.

Need Professional Guidance?

What if you don’t have a financial professional? This is an excellent time to start looking for someone. They can help you evaluate your current financial progress, create or refine strategies for your goals, and develop a personal game-plan for your personal retirement vision. And if you already work with a financial professional, but wonder if you can do more?

It’s good to consider secondary opinions, especially as you near the retirement home-stretch. Income planning and other retirement strategies are quite different from the financial and accumulation strategies people pursue in their working-age years.

Be sure to look for financial professionals with a particular specialty of retirement, its specific nuances, and solutions to help you make the most of your golden years.

If you are on the lookout for a financial professional, many stand ready to help you at SafeMoney.com. Use our “Find a Financial Professional” section to connect with someone directly. Should you need a personal referral, call us at 877.476.9723.

The post Roger Ibbotson Weighs in on Fixed Index Annuities first appeared on SafeMoney.com.

But what, then, about CDs? How do fixed index annuities stack up against them? To get a comparative overview of both financial solutions, let’s cover some history as well as key differences.

History of Fixed Index Annuities

Back in 1994, the bond market sustained heavy losses. In fact, it was one of the worst bond market declines in history. A massive bond selloff originated in the United States and Japan, which escalated into further heavy bond dumping in developed economies across the globe. The end result? Bondholders endured losses of over $1 trillion.

Over a 12-month period, interest rates spiked 1.5%. Despite the low risks of the bond market, investors realized nothing was “safe.” Financial instruments such as CDs also offered relatively low return potential. Demand grew for new options which would offer safety from market dowturns and yet more growth potential than financial vehicles with historically low interest rates. As a result, the fixed index annuity was unveiled in 1995. Since then, cumulative sales of fixed index annuities have topped $400 billion.

Fixed Index Annuities vs. CDs

So, in short, the fixed index annuity was created as an alternative to the low yields of CDs. Now here are three quick differences between them:

Principal guarantees – CDs and fixed index annuities differ quite heavily in terms of their principal guarantees. The Federal Depository Insurance Corporation (FDIC) is tasked with insuring bank CDs. In the event of bank failure, it covers principal amounts of up to $250,000. It doesn’t provide any guarantee for earnings.

As previously discussed, as currently set by Congress, banks offer reserves of $0.014 for every dollar. In contrast, state insurance commissions require insurance companies to guarantee one dollar in reserve for every dollar in deposit. As a result, the FDIC offers a “guarantee ratio” of $1.40 for every $100 while insurance companies provide a ratio of $100.00 for $100.00. Also, under state insurance commissions, state guaranty associations provides coverage of up to $250,000 in an annuity contract should the issuing insurance company fail. Note, however, that this coverage amount differs among guaranty associations for different states. For instance, some states have coverage up to $100,000. In many states, insurance carriers are reinsured by other insurance companies so their contracts and policies are covered in the event of company failure.

Tax liability – Unless they’re held in a retirement account like an IRA, CDs are subject to taxation. In contrast, fixed indexed annuities offer tax-deferred income generation and savings growth. For individuals exceeding the maximum allowable contribution limits for IRAs, a fixed index annuity can represent a valuable, tax-advantaged vehicle for growing savings.

It’s important to note that fixed index annuities do come with a heavy early withdrawal penalty, too. Like with other retirement accounts, early withdrawals from an annuity before an investor is aged 59.5 years are subject to a 10% penalty.

Distribution options – CDs come with limited options for fund distributions. In many cases, you’ll have a short window in which to withdraw money or add new funds to your account – usually during a period of CD maturation. Otherwise the CD automatically renews for a new, certain period – early withdrawals may be subject to penalties, too.

Comparatively fixed index annuities offer a number of choices. In general, annuity holders may be able to receive their money in amounts they specify after a specific period of time has passed. Withdrawal limits will vary from contract to contract, and it’s also important to note the length of annuity ownership required before surrender charges disappear. Annuities also offer another benefit.

Generally you have the ability to annuitize the contract at any point, which lets you receive a guaranteed lifetime income or ongoing payments for a certain set period. With joint and survivor options, fixed index annuities enable you or your partner to receive payments as long as one of you is alive, as well.

Other Important Details

It’s also worth noting that fixed index annuities and CDs can differ in terms of early withdrawal penalties and provisions of renewal. They can differ depending on the particular products you’re comparing.

Also worth noting is the the ability of a fixed index annuity to earn interest. Its growth potential is limited in exchange for the security it offers from market volatility. Interest earnings can vary depending on how the index to which the annuity is linked performs, and how the annuity calculates interest earnings potential, among other factors. To reemphasize, fixed index annuities were created as an alternative to CDs and other conservative vehicles. They’re designed to offer strong financial growth opportunities than CDs do.

Interested in Learning More?

The bottom line? Fixed index annuities were created as an alternative to CDs. But like with all financial solutions, their value will differ among investors. It’s important to determine your goals and evaluate whether this retirement vehicle is a suitable fit for your needs.

If you’re ready for personal help, SafeMoney can assist you. Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

The post Differences between Fixed Index Annuities and CDs first appeared on SafeMoney.com.

Consider the following data:

• Since 1995, Americans have purchased almost $400 billion in fixed index annuities (From Advantage Compendium Ltd)
• 99.994% of indexed annuity owners have no complaints about their indexed annuity purchase (Advantage Compendium Ltd)
• Only 0.006% of indexed annuity owners have registered complaints about their annuity product purchase (Advantage Compendium Ltd)
• In a 2012 study, 83% of indexed annuity buyers and 86% of traditional fixed index annuity buyers reported satisfaction with their annuity purchase (LIMRA)
• At the close of 2014, fixed index annuity sales were $47 billion, a 104.3% increase from sales in 2004 ($23 billion in sales that year) (Beacon Research)

Fixed index annuities were originally created as a financial alternative to CDs and their meager potential for retirement income. The catastrophic effects of the 2008-2009 financial crisis and the changing dynamics within the American workplace landscape also have had an impact. Now many Americans are exploring fixed index annuities as an alternative retirement vehicle.

Fixed Index Annuities Review: Other Details

Why are consumers find fixed index annuities attractive? We’ve covered the pros and cons of this investment option, but here’s a brief rundown:

Principal protection – Investments within the stock market offer high return potential. But with the stock market’s volatility, they are also subject to heavy risks. That includes risks of losing some of the money you originally invested.

It’s a different outcome for fixed index annuity products. When market downturns arise, your principal is protected. Also with other annuity products like variable annuities – your principal isn’t protected. Like with all financial products, we recommend you be fully educated about different product features before making any purchase.

Some measure of growth potential – Keep in mind: Fixed index annuities were created to give options with stronger potential for interest earnings than CDs and their limited returns. Fixed indexed annuities are linked to equity indexes such as the Standard & Poor’s 500 Index. Based on this index’s performance, investors receive a percentage of the index’s change in the form of credited interest.

This interest rate is often capped at a preset maximum. But fixed index annuities do offer some measure of growth potential. In times of market downturn, investors are given a guaranteed minimum rate (usually 1-2%). Or they may come with another feature, in which a fixed index annuity contract is credited zero percent, but the principal and credited interest earnings are retained.

Guaranteed income – Like all annuity products, fixed index annuities are a contract between investors and an insurance carrier. You pay premiums to the insurance carrier, and in return you are given certain contractual guarantees and periodic payments in the future.

Premiums can be a series of payments or one lump sum. The payments you receive can be over different periods of time. Be sure to educate yourself on the options available to you.

Guaranteed death benefit & tax deferment – Fixed index annuities offer tax-deferred fund growth. They also provide guaranteed death benefits for beneficiaries. Other benefits may be included, but these are often dependent on specific annuity products.

Help a Click Away at SafeMoney.om

Via SafeMoney.com, you can connect with a financial professional, schedule a no-obligation consultation to discuss your goals, and see if an annuity is right for you. With its benefit of wealth protection and guaranteed income, a fixed index annuity may help you secure the lifestyle of your dreams in retirement. We invite you to speak with a financial professional to get started.

Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

The post Fixed Index Annuities Review first appeared on SafeMoney.com.

Comparatively, financial products such as CDs offer low return potential. They also don’t offer a guaranteed lifetime income option. And for seniors looking to bolster their retirement income, the ups-and-downs of the stock market puts retirement dollars at risk. After all, the market moves through cycles. Historical data shows it can take years for the market to recover.

A fixed index annuity offers protection from the effects of a falling stock market. Like any annuity product, it is a contract between someone and an insurance company for a specific period of time. You pay premiums to the insurance carrier, and in exchange you are given certain contractual guarantees and are promised periodic payments in the future.

The premiums you pay can be in the form of a one-time lump sum, or a series of payments. A fixed index annuity grants a minimum guaranteed interest rate, but what makes it unique is it is linked to an index. This connection offers the potential for higher interest earnings over time.

What is a Fixed Index Annuity: Other Details

The surrender period on a fixed index annuity tends to last 7-16 years. The fixed index annuity is tied to an index such as the Standard & Poor’s 500 index. There are no shares of any stock or of an index involved. The interest credited to the contract most often consists of a percentage of what the specific index did in an investment year.

Let’s say this particular index goes up. You would receive a set percentage of the index’s yearly change from when you paid into your annuity until one year from then. This set percentage can be subjected to a pre-set maximum. The interest is calculated with a formula based on changes in the index – the formula determines how much interest, if any, is credited.  

Like other fixed annuities, the fixed index annuity also comes with a minimum guaranteed rate (for instance, 1-2%). When the index goes down, it doesn’t matter if its interest rate is lower than the minimum guaranteed rate. The value of your annuity will not drop below the contract’s specified guaranteed minimum. The annuity’s principal and credited interest are not subject to market risk, either – with variable annuities, the principal can be at stake.

In short, in exchange for giving up some greater growth potential, you can mitigate market risk with a fixed index annuity.

Important Fixed Index Annuity Features

There are three primary features which influence a fixed index annuity’s index-linked interest rate. For more details, check out our Fixed Index Annuities content page.

• Indexing method – the method used to measure the amount of change within an index. These methods include the following: annual reset (ratcheting), high watermark, high water with look-back, short-term point-to-point, long-term point-to-point, monthly average, daily average, and monthly cap.

• Participation rate – the rate which determines how much of an increase in an index is used to calculate index-linked interest. Let’s say the change in the index is 10% and the participation rate is 70%. In this case, the index-linked interest rate for the annuity will be 7% (.1 x .7 = .07).

Participation rates can vary for newly issued fixed index annuities as much as by each day. The participation rate is set by the insurance carrier for a specified time period (often year-to-year or the entire period). When this period is over, the insurance carrier sets a new participation rate for the next period.

• Cap rate – Some annuity contracts will set a cap, or upper limit, on the index-linked interest rate. It is the maximum interest rate that the annuity can earn. Most fixed index annuity contracts have this feature as one of the index choices.

Fixed Index Annuity: Other Need-to-Know Information

Fixed index annuities also offer tax-deferred savings growth, give a guaranteed death benefit for beneficiaries, have an option for a guaranteed lifetime income, and are without annual contribution limits as long as they are flexible premium annuities. There are other benefits, too, but they can depend on the features of your specific fixed index annuity.

One downside is you have limited growth potential for the money in your contract. There are many fixed index annuity variations which may make it challenging to choose the right one for your needs. And in all annuity contracts, funds withdrawn before you’re 59.5 years of age are subject to a 10% penalty. Likewise, when they are withdrawn, earnings are subjected to taxation as ordinary income depending on your tax bracket at the time of your withdrawal.

Fixed index annuities can also differ. They may have different penalties for early withdrawals, may offer different index options, and may credit interest at different rates.

If you’re looking at a fixed index annuity contract, consider asking the following questions:

•    How long is my annuity’s term?
•    What is the contract’s minimum guaranteed interest rate?
•    What is the participation rate? How long is it guaranteed for?
•    Is there a minimum participation rate?
•    Does the contract have an interest rate cap? If so, what is the cap?
•    Does the contract have an interest rate floor? What is it?
•    Is interest rate averaging used? How does it work?
•    Is interest compounded during a term?
•    Are there any fees within the contract? If so, what are they? How do they arise?
•    What indexing method is used?
•    What are the surrender charges if a contract is ended early?

There are many options for fixed index annuities out there. Like with any financial decision, it’s best to take time to carefully educate yourself and plan.
If you’re ready for personal attention, meeting with a financial professional can help you clarify your goals and see if an annuity makes sense for your portfolio.

SafeMoney.com can connect you with someone to discuss your situation. They can help you determine whether a fixed index annuity can assist you with your lifestyle goals. Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

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