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Fixed Indexed Annuities: Worry Free or Risk Filled Cash Ride?

Keith L. Collins

A survey by Financial Research Corporation showed that more than 36% of investors ask about the guarantees of Fixed Income Annuities. It is a fact that the collapse of several high profile corporations in the previous decade has severely shaken investors’ confidence over financial market investments. Most investors are now concerned about the safety of their investments.

Fixed Indexed Annuities (FIAs) can be a great answer to a lot of worries of conservative investors. They offer protection from market volatility, interest rate, and inflation risks. In its simplest form, they work like social security or pension plans that provide reliable periodic payments with some FIAs even assuring a fixed monthly payment for life. They are ideal for investors nearing retirement. Still, are they worth the Investment?

Rewards of Fixed Indexed Annuities

The fixed indexed annuity has emerged as a product of choice for investors who are generally risk averse and want guaranteed returns on their investment. The growing demand for low risk, attractive investment alternatives have led to strong growth of fixed income annuities. FIAs are best suited to long term investors looking to secure their investment portfolio.

Guaranteed Principal Protection

FIAs are backed by the capital, reserves, and surplus of the insurance company. Most other financial investment products do not specify that the principal is protected, fixed indexed annuities do. The FIA contract specifies that the principal amount is guaranteed. The only way an investor can lose principal is to prematurely take out the investment before the specified date mentioned in the contract.

High Growth Tax Deferred Returns

FIAs allow investors to participate in the stock market(s) while preserving their principal from risk of default. They reduce market risk, inflation risk, and interest rate risk, and offer growth potential linked to a market index with no downside risk. The returns of FIAs are generally higher than fixed instruments such as CDs, money market accounts, and bonds. Moreover, the investments in FIAs are not subject to market risk and their returns can never be negative. There is usually a guaranteed minimum return that ranges from 1 – 3%. Also the FIAs returns are tax free until they are cashed out of the account.

Insured By State Guaranty Associations

Every FIA includes a notice from the state guarantee association that the principal is insured up to a stated limit. In case of insolvency of the financial carrier, the state insurance department can take over the responsibility of FIAs in a process known as Rehabilitation. Even after the most recent financial crises, no indexed annuity owner has ever lost the principal due to market volatility or carrier insolvency.

The Death Benefit Guarantee

Some FIAs offer a lifetime benefit option that pays out even if a person outlives the principal amount. The insurance company pays out from its own reserves. The guarantee lifetime-income rider solves longevity risk and provides a guaranteed stream of income for life.

Risks With Fixed Indexed Annuities

Although equity indexed annuities are tied to a market index, they do not offer the same return as investing in stock markets. Most FIAs offer a cap on the returns that they will pay, regardless of the performance of the indexed stock. For example, if there is a cap of 8%, you will not get more than this rate even if the linked stock performed higher than 8%.

In most cases, FIAs are not even considered as securities or an investment product. The companies that sell FIAs are not regulated by the SEC or FINRA, and they do not need to have securities licenses.

The second risk of FIAs is that they are generally illiquid. The insurance company penalizes withdrawals before the five – six year mark. Furthermore, the IRS exacts its own (10 %) penalty if you withdraw any cash before you are 59½.

How to Mitigate Risks While Increase Rewards

If you do value the pension-like properties of FIAs enough to opt for one, you should get the most out of your money shopping around. The best trick is to find an insurance company that has the financial muscle to make good on its side of the bargain well into the future.

There are various credit rating agencies that provide the financial suitability of the insurance companies. When you go shopping for FIAs, consider only companies that have ratings of A+ and A++.

Additionally, there are further guidelines that you should follow in order to mitigate the risk of FIAs and gain maximum possible rewards.

  • Keep it simple. Like new cars, FIAs come with all sort of optional extras – particularly, guarantees that the investment will be returned if the investor dies young. Such guarantees do not usually provide value and make it an expensive proposition for the prospective buyers.
  • Avoid annuities that charge up-front fees. In theory, up-front fees or “loads” may be a good deal that collects all of the fees annually. Yet, they are too often a sign that the insurance company is relying on its commission based sales force to sell the FIAs, rather than quality of the financial products.
  • Perform Yearly Audits. After purchasing the FIAs, you should perform a reality check at least once a year.

To learn more from this educator, click here (Keith Collins).

About the Author:

Keith Collins is the President and founder of Keith Collins, Inc., which is an independent firm specializing in retirement income planning and Estate planning. For over 20 years, Keith Collins, Inc. helped clients protect their assets and maximize their retirement income in the Central Massachusetts area.

For more information, visit the website at or directly contact Keith toll free at 888-508-3736 if you would like personalized help.


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1 Comment

  • Paul Betken says:

    Hi: My HOA wants to invest a $100,000 into a FIA. I am a little troubled by this. The money would be from a Reserve Fund currently and the term would be for 10 yrs. Is this a good idea? Thank you.

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