Instead of providing a guaranteed interest rate like a fixed annuity, an indexed annuity offers the potential to earn higher interest rates. There is a trade-off though; the only guarantee is that you will never be credited less than zero percent.
Shopping for a fixed index annuity may seem overwhelming but it doesn’t have to. In our Ultimate Guide to Fixed Index Annuities, we will cover everything you’ll need to know to make an informed purchasing decision.
All annuity sales fall into one of three categories. The first thing you should do when considering a fixed index annuity is to decide what your objective is for this portion of your retirement savings. Is it:
1. If you are shopping for an annuity designed for accumulation it is best to stick with shorter duration contracts; we typically recommend 5 or 7 years or a combination of the two.
2. If it sounds too good to be true it probably is. There are some fixed index annuities that show a hypothetical average annual rate of returns of 9.5% net. The S&P has averaged 9.3% over its history and that is with unlimited downside risk.
A fixed index annuity is a contract between you and an insurance company that may help you reach your long-term financial goals. In exchange for your premium payment, the insurance company provides you income, either starting immediately or at some time in the future.
NOTE: You may also hear of a fixed index annuity referred to as a:
In plain English, a fixed index annuity provides the most upside earning potential of any savings vehicle with principal protection. You can not lose your money in a fixed index annuity because it is a type of fixed annuity and your money is not invested directly in the stock market.
The primary benefits of an index annuity are:
Potential for higher interest rates
Principal Protection from a potential stock market crash
Indexed annuities can help you build a source of guaranteed lifetime income, save for a specific retirement goal, or leave a legacy for your loved ones via an optional death benefit rider (life insurance provides better leverage if you are healthy).
Long-term care riders and benefits are also available and can leverage your annuity account value by 300% for long-term care expenses.
In addition, as stated in the PPA of 2006, any gain in a nonqualified annuity will come out tax-free if used for long-term care expenses.
Under current federal income tax law, any interest earned in your fixed index annuity contract accumulates tax-deferred. You don’t have to pay income taxes on any of your gains until you begin withdraw the funds from your contract.
Withdrawals are taxed as ordinary income using the LIFO (last in first out) method and, if taken prior to age 59½, a 10% federal additional tax may apply.
The below chart shows how tax-deferral can impact the value of an indexed annuity over time. The chart assumes a $100,000 index annuity grows at 4% compounded annually and compares the index annuity’s account value 20 years later with and without tax-deferral.
As you’ll notice the index annuity growing tax-deferred for 20 years has a value of $50,000 greater than a taxable investment.
Disclosure: This example assumes a 33% ordinary income tax assessed annually on taxable earnings and at the period ending on indexed annuity tax-deferred earnings. Actual tax rates may vary from this example for different taxpayers and assets (e.g., capital gains and qualified dividend income). The actual performance of your contract will also vary.
Hypothetical interest is not guaranteed and does not represent the performance of any particular index annuity. If a withdrawal or distribution is taken, the tax-deferred earnings would be reduced by income taxes on any interest and, if taken prior to age 59½, a 10% IRS tax penalty may apply.
Consider your personal retirement plan and income tax brackets, both current and anticipated, when making financial decisions.
Fixed index annuities provide an opportunity for potential interest growth based on changes in one or more indexes. Because of this potential indexed interest, FIAs provide a unique opportunity for accumulation.
And since the interest your contract earns is tax-deferred, it may accumulate assets faster. In addition to potential indexed interest, FIAs can offer you an option to receive fixed interest.
Fixed index annuities offer you a level of protection you may find reassuring. That protection can benefit you in three separate ways:
• Accumulation: Your principal and credited interest are protected against market downturns.
• Guaranteed income: You can be protected from the possibility of outliving your assets.
• Death benefit: If you pass away before annuity payments begin, a fixed index annuity may help you provide for your loved ones.
|SILAC||Denali 14||B+||14 Yrs||7.00%||10% / 10%|
|SILAC||Denali 10||B+||10 Yrs||5.75%||0% / 5%|
|SILAC||Denali 7||B+||7 Yrs||5.50%||0% / 5%|
|SILAC||Teton 14||B+||14 Yrs||5.50%||0% / 10%|
|Guggenheim||Highlander||B++||7 Yrs||4.75%||0% / 10%|
|Nassau||Growth Annuity 10||B+||10 Yrs||5.25%||10% / 10%|
|GILICO||WealthChoice7||B+||7 Yrs||5.00%||10% / 10%|
|Oxford Life||Select Series 10||A||10 Yrs||4.75%||0% / 10%|
Investors who own annuities, across all wealth segments, are more confident that their savings and investments won’t run out, even if they live into their 90s.¹
When you purchase a fixed index annuity, you can allocate your account value to one or more index. At each contract anniversary the performance of your selected index is measured and one of the index annuity crediting methods is applied to determine how much interest will be credited to your annuity for that contract year.
Step #1: Determine the market index’s annual performance.
Step #2. Apply the crediting method applicable to your index annuity.
If the stock market index performs your index annuity will automatically be credited interest, subject to a participation rate, a cap, or spread. Interest credited to an index annuity is locked in annually, and cannot be lost due to any future stock market index declines.
The annual lock-in and annual reset feature are two huge benefits of an index annuity and they are not talked about enough.
The annual point-to-point indexed annuity crediting method compares index values from two points in time; your contract issue date and the annual anniversary. If the result is positive, interest is credited, subject to the cap, spread, or participation rate. If the result is negative, the credited interest rate is 0%.
The below graph shows a hypothetical index value change from 100,000 on contract issue to 107,000 on contract anniversary. This represents an annual index performance of 7%.
Calculate the Specified Market Index Performance to determine how much interest is credited to your index annuity.
No single index annuity crediting method consistently delivers the most interest under all market conditions. You can use one of these annuity calculators to “play with some numbers”.
|Index Performance||Cap||Interest Earned|
|Index Performance||PAR Rate||Interest Earned|
|Index Performance||Spread||Interest Earned|
|Annuity Company||AM Best Rating||Stock Market Index Page|
|AIG||A||S&P 500 (Ticker: SPX)|
|AIG||A||AQR DynamiQ Index|
|AIG||A||Merrill Lynch Strategic Balanced Index (MLSB)|
|AIG||A||PIMCO Global Optima Index PIMGOPT|
|AIG||A||Russell 2000 Small Cap Market Index .RUT|
|AIG||A||MSCI EAFE – Non U.S. and Canada Index EAFE|
|Allianz Life||A+||S&P 500 (Ticker: SPX)|
|Allianz||A+||Nasdaq 100 Index|
|Allianz||A+||Blackrock iBLD Claria Index (IBLDCLRA)|
|Allianz||A+||PIMCO Tactical Balanced Index|
|Allianz||A+||Bloomberg US Dynamic Balance Index II|
|American Equity||A-||S&P 500 Daily Risk Control 2 8% Index|
|American Equity||A-||Dow Jones Industrial Average (DJIA)|
|American Equity||A-||S&P 500 Dividends Aristocrats Index|
|American Equity||A-||S&P 500 (Ticker: SPX)|
|Athene||A||AiPex Performance Index|
|Athene||A||S&P 500 Daily Risk Control 2 8% Index|
|Athene||A||NASDAQ Fast Convergence Index BOFANFCC|
|Athene||A||S&P 500 Daily Risk Control 5% Index|
|EquiTrust||B++||Barclays Focus50 Index (BXIIF50E)|
|Fidelity & Guaranty||A-||S&P 500 (Ticker: SPX)|
|Fidelity & Guaranty||A-||iShares Real Estate ETF|
|Fidelity & Guaranty||A-||Balanced Asset 10 Index|
|Fidelity & Guaranty||A-||iShares Core S&P 500 ETF|
|Fidelity & Guaranty||A-||Balanced Asset 10 Index. Ticker: CIBQB10E|
|Fidelity & Guaranty||A-||Barclays Trailblazer Sector 5 Index (ticker BXIITBZ5)|
|Global Atlantic||A||PIMCO Balanced Index PIMBAL|
|Global Atlantic||A||MSCI EAFE Non U.S. and Canada Stock Index EAFE|
|Global Atlantic||A||Russell 2000 Small Cap Index .RUT|
|Global Atlantic||A||Blackrock Diversa Volatility Controlled Index ^IBLDV7E|
|Global Atlantic||A||Franklin U.S. Equity Index FTUSLX|
|Great American||A||S&P 500 Daily Risk Control 10% Index|
|Great American||A||IShares U.S. Real Estate ETF 1YR|
|Great American||A||S&P 500 U.S. Retiree Spending Index|
|Lincoln Financial||A+||Fidelity AIM Dividend Index|
|Lincoln Financial||A+||S&P 500 Daily Risk Control Index 5%|
|Nationwide||A+||S&P 500 Daily Risk Control 5% Index|
|Nationwide||A+||AB Growth and Value Balanced Index|
|North American||A+||S&P 500 Low Volatility Daily Risk Control 5%|
|North American||A+||S&P MARC 5% ER|
|North American||A+||Fidelity Multifactor Yield Index 5% ER|
|North American||A+||S&P 500 (Ticker: SPX)|
|North American||A+||NASDAQ 100 Index|
|Oxford Life||A-||S&P 500 Index|
|Oxford Life||A-||2 Year Citi Flexible Allocation Index CIISFM6E|
|Principal||A+||S&P 500 Index SPX|
|Reliance Standard||A+||S&P 500 Index|
|SILAC Insurance||B+||Credit Suisse RavenPack|
|The Standard||A+||S&P 500 Index SPX|
|2020 Rank||Annuity Company||2020 Sales|
|4||Sammons Financial Companies||$3,743,678|
|5||Fidelity & Guaranty Life||$3,458,101|
|8||Security Benefit Life||$2,882,395|
The line graph below compares the sales of variable annuities (VA) and fixed index annuities (FIA) in the United States from 2006 to 2020. Variable annuities are represented by the blue line while the red line represents indexed annuity sales.
As you can see, variable annuities have decreased in popularity significantly while fixed index annuities are becoming increasingly popular. VA sales decreased from approximately $185 Billion in 2006 to ~$100 Billion in 2020 while index annuity sales increased from ~$75 Billion in 2006 to ~$120 Billion in 2020.
2016 marked the first year that individual fixed index annuity sales surpassed variable annuity sales in the United States. This is due in large part to the high cost and fees associate with variable annuities vs. low or no fees of an index annuity.
Typical Variable Annuity Fees
If you are considering purchasing a variable annuity you will find download the U.S. Securities and Exchange Commission’s (SEC) Variable Annuities: What You Should Know investor tips here.
10% Free Withdrawals
Annual free withdrawals up to 10% of your index annuity’s account value annually without penalty.
Interest Only Free Withdrawals
Withdraw your index annuity’s accumulated interest annually without penalty.
Extended Care Waiver Rider
If you are confined to a nursing home or long-term care facility for at least 90 consecutive days (after the first contract year), this waiver provides you with the option to withdraw 100% of your index annuity’s account value without penalty.
Terminal Illness Rider
After the first contract year, if you are diagnosed by a physician as having a terminal illness, you have the option to withdraw up to 100% of your indexed annuity’s value without penalty.
Our Annuity Terms Glossary has a comprehensive list of index annuity terms and definitions written in plain English.
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