Of all the features of a Fixed Index Annuity (FIA), arguably the one with the greatest value is the annual reset.
What this means is that every year on the anniversary of the policy, any gains in the market (based on the strategy which you have chosen and an index such as the S&P 500) will be credited to your policy and then ‘locked in’. So if the market goes down in the next year, not only will you not go down (you will stay level) but the gains made in the previous year that were locked in are yours as well. This can be compared to a ratchet on a jack for your car. As you move forward (up) you are protected from slipping backwards by the ratchet.
Let’s look at an example. Say you invest $100,000 and in year one the market (again as measured by an Index such as the S&P 500) goes up by 10% but your investment is subject to a 5% cap. Then at the end of year one, your investment will be worth $105,000. Say, then, that the market goes down by 10% in year two. Your investment at the end of year two will thus be worth $105,000 as you will not share in the market’s drop.
Contrast this with someone who is invested directly in the market (S&P 500). At the end of year 1 his investment is worth $110,000 (10% gain). But then at the end of year two, his investment is worth $99,000 as he would have lost 10% of $110,000.
The bottom line is it’s safer to give up some of one’s gains in order to be protected from the downside and being assured that any gains made will be locked in on an annual basis.
This power of the reset is made all the more powerful when one bears in mind that if the market drops say, 10%, then it will need to grow by more than 10% (in fact 11.1%) in order for you to get back to where you were.
The power of the reset is significant, just ask anyone who was invested in FIAs (or not) in 2008.
To learn more from this author, click here (Anton Hendler)
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