For those of you who are clients of ours, you will know that one of our primary retirement strategies is the use of the right combination of annuities including Fixed Index Annuities (FIAs).
Fixed Index Annuities (FIAs) are annuities which are tied to the stock-market via one or a combination of indexes such as the S&P 500. This allows owners of these annuity policies to share in any upside growth BUT at the same time, investors are shielded from any downside risk.
The most important benefit of the FIA is the Annual Reset. The power of this is huge. What it means is that at every anniversary, the insurance company will look back a year and credit any growth made for that year. And once that credit has been made, you are ‘locked-in’. Even if the market goes down in the subsequent year, you will stay level. It is something like a ratchet which does not allow you to slip backwards.
Obviously one pays a price for this, and this price is by way of Participation rates and Caps. A Participation rate means that you share in the growth of your index but only to the extent of your participation rate (50% or even 100%). A cap basically limits the extent to which you can participate in the growth by setting an upside limit-a Cap.
What is critical to note here is the relatively small price one is paying in order not to be affected by any market downside. Remember that a market drop of, say, 25% will mean that it will have to grow by 33.3% just to get back to where you were. So by staying level in a negative year, you put yourself ahead of the market for future years even after allowing for Participation rates and Caps.
Different insurance companies will quote different Participation rates and Caps and these will differ from product to product. Hence the reason why it is so important to know what is out there, and to get the best deal given your particular circumstances. That is where your agent and his back-office come in. He/she will go out into the market and source the best deal for your circumstances. As always, no two investors are the same, so it will depend on what you are looking for before you can be paired with the right product.
The Fixed Index Annuity is a great product, but it’s equally important to be in the one that fits you best, so make sure your agent knows what he/she is doing and that you get the best fit and the best deal.
To learn more from this annuity professional, simply click here (Anton Hendler).
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