Given the current market uncertainty we thought it a good time to revisit the question of Fixed Index Annuities (FIAs) and whether one can, in fact, gain without losing.
The short answer is, of course, yes. But there are a few points that need to be made to properly explain what is meant by gaining and losing.
Certainly with a FIA you will never share in any market losses. Your gains, if there is a gain, are ‘locked in’ on a set basis (usually every year) and you cannot then lose these. You could lose out on the opportunity cost of not having your money elsewhere, but you will never take a market loss as a result of a fall in the market. At worst you will stay level and have no gain in a year where the index you are tied to goes down.
Now we can look at gains in the market. Always remember that with a FIA you are tied to an index, usually the S&P 500, as the name FIA implies. If the index goes up in the period under review (again, usually 1 year) then you will ‘share’ in that gain according to the terms of your contract. Because you are not directly invested in the market but merely tied to an index, you will never get the full extent of any gain, so to talk of gains without pointing out that it’s a share in that gain would be misleading.
Any gains made in a particular period would then be ‘locked in’ and you would never lose those gains in your principal. The beauty is that any future gains would then be earned on the new, higher, principal amount and the power of ‘compound interest’ would work its magic giving you interest on your interest.
Always remember that with FIAs you are giving up the chance to share fully in market gains in exchange for never having to share in any loses, and it’s this ‘power of zero’ that cannot be overstated. The value of never having to start off again from a lower level is where one can truly appreciate the mechanics of the FIA.
So one can get gains without loses with a FIA but, as always, the devil is in the detail. Make sure you know what you are buying as there are choices and pitfalls aplenty but, with the help of your agent, you can be guided to the right choice for your particular circumstances.
Watch the video below to hear from Hendler Financial Group about this very topic.
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