Fixed Indexed Annuities
As most people approach retirement, protection of principal becomes more of a concern. Yet, it is also still necessary to grow savings in order to help keep pace with future inflation. While most financial and investment vehicles will usually only offer safety OR the opportunity for growth, a fixed indexed annuity can provide both.
How Fixed Indexed Annuities Work
Fixed indexed annuities are structured like most other annuities - with an accumulation period and an income payout period. However, the difference between a regular fixed or variable annuity and a fixed indexed option comes in how the return is determined.
With a fixed indexed annuity, the funds inside of the account will track the performance of an underlying market index, such as the S&P 500. (There is also typically a fixed account option, though).
If the underlying index's return during a given year is positive, the annuity will be credited with a positive return - generally up to a certain maximum, or "cap." But if the performance of the tracked index is negative during a given year, the account will not lose value. Rather, it will just simply be credited with a 0% for that time period. And, as with other types of annuities, these funds are allowed to grow tax-deferred.
Because of this "gain but no lose" situation, fixed indexed annuities are often said to offer the best of both worlds. In addition, fixed indexed annuities can also be converted over into an income stream. Here, if the lifetime income option is chosen, the annuity will continue to pay out an income stream for the remainder of the annuitant's lifetime - regardless of how long that is.
The Benefits of Owning a Fixed Indexed Annuity
There are numerous benefits that can be attained by owning a fixed indexed annuity, including:
- Protection of principal
- Tax-deferred growth
- The opportunity for market-linked returns
- Lifetime income in retirement
Also, some fixed indexed annuities will offer additional features, such as allowing the holder of the annuity to access funds penalty-free if he or she is diagnosed with a terminal illness, and/or for the payment of skilled nursing home expenses.
Determining Whether a Fixed Indexed Annuity is Right for You
Even though fixed indexed annuities can offer many nice benefits, these particular products are not the right fit for every investor's needs. However, you may be a good candidate for a fixed indexed annuity if you want to:
- Grow funds without the worry of market volatility
- Continue adding to a tax-advantaged financial vehicle, even if you have already "maxed out" your employer-sponsored and/or IRA account(s)
- Receive an income for life and not be concerned about running out - even if you need the income for many years
How to Narrow Down the Best Fixed Indexed Annuity Option for You
If you are considering a fixed indexed annuity for your overall financial portfolio, it is important to keep in mind that not all of these annuities are exactly the same. In addition, there are a number of different riders that may be added to a fixed indexed annuity in order to essentially "customize" it to fit individual financial needs and goals.
With that in mind, before you move forward with making a long-term commitment on a fixed indexed annuity, be sure to discuss the various alternatives with an expert in the insurance and annuity field. That way, you can proceed knowing that you are choosing the right option for you.