What are Fixed Index Annuities?

Fixed Index Annuities (FIAs) are a type of annuity that offer income earning potential similar to stock index investment while also providing principal protection benefits of annuities. They offer tax deferral benefit, lifetime guaranteed income, death benefit, and a variety of income options for accelerated growth of the saving amount.

FIAs are different from stock market investment instruments in that there is no direct investment in the stock market. They are also different from traditional annuities as the returns are not fixed and based on the performance of selected stock market indexes during a particular period.

What’s more, your money invested in the FIA account remains safe and is not affected by the negative performance of stock market index during a particular year. In case of positive stock market movement, you will receive similar returns on your account limited by a cap. However, in case of negative stock market movement, your account will remain intact with no deductions from your FIA account.

Value Added Features of Fixed Index Annuities

FIAs can be a gateway to your financial freedom during retirement. The financial instrument offers various unique features not find in any other retirement savings account. Some of the main highlights of FIAs include:

• Principal Protection and Safety,
• Lifetime Payments,
• Death Benefit,
• Reasonable Rate of Return, and
• Tax Free Benefits

Insurance companies that offer FIAs continue to offer additional innovative features to spice up their offerings for the consumers. These incentives offer you great potential to build, protect, and grow your retirement savings overtime.

Note: Principal protection guarantees depend on the financial strength of the Insurance Company. Also, annuities containing additional features entail higher charges and fees as compared to those bereft of the features.

Factors that Affect Income Earned from Fixed Index Annuity

The income you earn on FIA account is linked to the performance of a selected stock index during a particular period. However, various factors affect the actual income that is credited to your FIA account. These include:

Cap

Most FIAs fix a cap to the maximum rate at which you will receive income during a specified period. So, if the cap is 8% during a period while the market index appreciates by 15%, the rate at which income will be credited to your account will be 8% instead of 15%.

Spread

The income earned on some FIAs is also subjected to a spread. The spread is subtracted from any gain in the stock market index during a specific period. For instance, if the stock market appreciates by 15%, but the spread is 6%, the annuity income rate will be 9% (15-6).

Participation Rate

The participation rate refers to how much of the appreciation in index will be considered when calculating FIA income. If the participation rate were 100%, you will receive income based on 100% of the change in the market index. Usually, the participation rate is applied after considering the cap but before a spread.

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