One thing that is for certain in the Insurance Industry (or any service industry) is that the market will always react to demand for a product. It’s no different with Fixed Index Annuities (FIAs), and recently we have seen more and more ‘Uncapped Products’ offered in reaction to the markets demand for a greater share of upside gains.
As with any FIA where you always only share in the market upside (but never in the downside) there are costs and limitations involved so provided you know what these are, and bear them in mind, you can make an educated decision as to whether these are right for your particular circumstances.
Amongst the many things you should bear in mind are the following.
- There is always a cost associated with any benefit. In this case, the cost is usually by way of a percentage of accumulated value, or a ‘spread’ on the index growth. The first is a pure charge to the accumulated funds (around 1.5%pa) and, in the unlikely event that there is no growth over the term of the annuity (usually 10 years) the insurance company will credit back this charge so that you never lose any capital invested over the 10 years. If it’s a spread then you will only get credited with growth if the index goes up by more than the spread (usually less than 2% pa). These are just two of the ways charges are levied, clearly there are others and you should be aware of these.
- You will always only ‘share’ in growth. Whilst you are getting an Uncapped Strategy, the insurance company has to make a return, and has to find a way to allow them to share in any growth. This is sometimes done by only allowing a max of, say, 65% or 70% to be allocated to a market index (usually the S&P 500) whilst the balance has to be invested in a ‘Declared rate” allocation. At present, because interest rates are so low, declared rates are typically around 1%. So around 30-35% of your money will get this declared rate and you only get your share of growth on the balance. Again, there are other methods to limit your upside and you need to know what these are before committing to a product. It is also important to note that the fee and/or spread mentioned above apply only to the uncapped portion of your money and not to the declared rate portion.
- Crediting and the opportunity to vary investment options can take place every 2 or more years as opposed to every year with the more traditional FIA. This means that you can choose to change strategy every 2 years (or more) but, by the same token, the insurance company can vary the strategies and declared rates etc. every 2 years. It is important to bear in mind that whilst you never know going into a FIA what the insurance company will do in subsequent years regarding rates etc. they are in a competitive market so they have to always remain competitive and therein lies your safeguard of always getting competitive terms. Some products do offer a 1 year strategy term, and some we have heard of are offering up to 5 years, again know what the term is, and why.
With any product there are Pros and Cons, the answer is to be educated and to work with an Advisor who can help you navigate the many options available so that you can choose the right one.
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