A Beginner’s Guide to Fixed Index Annuity

Have you wondered if you will have enough money to quit your job one day? A staggering 64 percent of Americans are not prepared to retire! 

If you want to make sure you can meet your financial needs in the future, our fixed indexed annuity guide can help. Keep on reading to find out more. 

What Is a Fixed Indexed Annuity?

A fixed indexed annuity is a long-term savings option. It gets issued by an insurance company. It’s tax-deferred and protects you in a downward market, with opportunity for growth. 

The fixed indexed annuity is a contract between you and an insurance company. Depending on the company, you may get the option to convert the balance into a certain amount of steady lifetime income. 

A fixed indexed annuity gives you more growth potential than a regular fixed annuity. It also has less risk than a variable annuity, so it may be like having the best of both worlds meeting in the middle. 

You earn interest based on changes in the market. With a fixed indexed annuity, you get the benefit of having an income you never outlive. Once interest gets credited to your account, you can’t lose it. 

The original deposit won’t decline even when the index doesn’t perform well. You get assured of a minimum rate of return for a certain number of years. 

These types of annuities get regulated by state insurance commissioners. The agents that sell them must have life insurance licenses. The insurance company assumes all the risk with fixed indexed annuities.

How Do Indexed Annuities Work?

What is an indexed annuity? This type of annuity is another type of contract between you and an insurance company. You can either make a series of payments or a one-time payment into an account. 

You can use your deposited funds to build up the tax-deferred money. Taxes get paid once you make a withdrawal. 

An indexed annuity will offer the option of higher returns than fixed annuities. That will happen when the market does well. They usually provide some protection in case the market goes in a downward trend.

Indexed annuities may not see the total benefit of an index rise. These types of contracts sometimes set percentage limits on possible gains. That gets called the participation rate. 

The participation rate can get as high as 100% but could also get set as low as 25%. In the first years of the contract period, the participation rate is around 80 to 90 percent. If the stock index gains 20%, and your participation rate is 80%, you get credited with a yield of 16%. 

Most of the contracts come with a rate cap. That means the yield amount gets limited to a cap no matter how well the stock performs. These can range anywhere from 4 to 15% in most cases. 

The principle never declines with an indexed annuity. The insurance company will adjust the account value that will include any gains. That usually gets done every year or more. 

Benefits of Indexed Annuities

With indexed annuities, you have a death benefit. That means if you die, the money can go to your beneficiary. It will not have to go through probate. 

You get to take out ten percent each year without paying penalties. It would be like withdrawing money from a savings account. 

Since an indexed annuity is tax-deferred, you won’t have to worry about not building up enough in your account. No taxes get taken out until you withdraw the money. 

If you have to go to a nursing home, you can get all of your money. That means you get one hundred percent without getting penalized. 

Things to Consider

Not all annuities offer the same things. You need to know what you want to get from an annuity. Some may provide family and death benefits.

When deciding to buy an annuity, you need to know how much retirement you will get from all sources. Do you have other plans? How much will you get from social security and your savings?

Your earnings will get taxed. These come with federal and state taxes. If you withdraw it before you reach retirement age, you may also get hit with a ten percent penalty. 

Know how you want to use the money.  If you are close to retiring, a fixed indexed annuity will offer more stability and less risk.

Will you need the money in the next few years? Most annuities come with surrender fees. That’s the penalty that gets charged if you take money out early and affects the balance. 

Know the smallest guaranteed return. That shows what you will make no matter what the market does. If the worst-case scenario happens, you can see what you will have to live off.

What fees will you have to pay to the insurance company? There may be upfront fees to pay, and some that get paid every year. High charges to you will reduce your benefits. 

Planning For the Future

When thinking of retirement, you want to know how much money you will need. Since it is impossible to know how long you might live, it is best to plan for a long future. Calculating how much it could take to keep your family comfortable is the first step of making a retirement plan. 

During volatile periods, a fixed indexed annuity can provide you with less risk. You will reap the benefits of a comfortable retirement with added protection. If you’re ready to get started with or want to add to your retirement plan, contact us today and see how we can help!