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: Also referred to as:
During the accumulation phase of your contract, any interest credited is tax-deferred. If you purchase your fixed index annuity with after-tax dollars, you will only pay ordinary income taxes on your earnings – not on your premium payments – when you begin withdrawing money.
Tax-deferred growth, compounded over time, may increase the amount of savings and income your fixed index annuity generates for your retirement.
Tax deferral is also a benefit of traditional IRAs and 401(k)s. However, annuities don’t have any government-imposed contribution limits. Because of that, they can often be a good choice if you want to save more than IRAs and 401(k)s allow and still enjoy tax-deferred growth potential.
Purchasing an annuity within a retirement plan that already provides tax deferral results in no additional tax benefit. So use an annuity to fund a qualified plan based upon features other than tax deferral, such as lifetime income options or the guaranteed death benefit.
Tax deferral can be an effective part of your retirement strategy. For example, this chart shows how a $100,000 initial payment, compounded at 4% annually, grows tax-deferred. Twenty years later, after taxes are paid on the lump-sum distribution, the amount is greater than the amount accumulated in a taxable product after 20 years.
Tax deferral can be an effective part of your retirement strategy. For example, this chart shows how a $100,000 initial payment, compounded at 4% annually, grows tax-deferred. Twenty years later, after taxes are paid on the lump-sum distribution, the amount is greater than the amount accumulated in a taxable product after 20 years.
A fixed index annuity provides upside potential based on the performance of a market index. Indexed annuities also provide downside protection from market downturns and have a floor of zero percent; meaning the worst your account can do in any given contract year is stay flat.
The manner in which Fixed Indexed Annuities credit interest varies from company to company and product to product. Here are some of the most common interest crediting methods seen in an index annuity
This is the simplest of all index annuity crediting methods; it is also the most common.
Annual point to point uses the index value from only two points in time so this may be a good choice if you want to minimize the effects of mid-year market volatility.
As an example let’s assume an index change of 7% and apply the cap, spread or participation rate. For this example we will assume a 5% cap, 2% spread and a 75% participation rate.
5% Cap = 5% Interest credited (index change up to the cap)
2% Spread = 5% Interest credited (index change – spread)
75% Participation Rate = 5.25% Interest Credited (index change X spread)
Before we cover the available index annuity crediting methods we should explain the different types of crediting components. Crediting components will affect how your indexed interest is calculated. These crediting components include:
Some fixed index annuities set a maximum rate of interest (or cap) that the contract can earn in a specified period (usually a month or year). If the chosen index increase exceeds the cap, the cap is used to calculate your interest.
For example, if the annual cap in a hypothetical example were 3.00% and the value of the index rose by 4.80%, the cap amount of 3.00% would be credited to your contract. However. if the index change was 2%, your contract would be credited 2% since that is lower than our hypothetical cap.
| Index Performance | Cap | Interest Earned |
|---|---|---|
| 8% | 5% | 5% |
| 5% | 5% | 5% |
| -3% | 5% | 0% |
In some annuities, a participation rate determines what percentage of the index increase will be used to calculate your indexed interest.
For example, let’s suppose the index rose by 10%. If a hypothetical FIA had a 75% participation rate, the contract would receive 7.5% in indexed interest.
| Index Performance | PAR Rate | Interest Earned |
|---|---|---|
| 10% | 80% | 8% |
| 5% | 80% | 4% |
| -5% | 80% | 0% |
The indexed interest for some annuities is determined by subtracting a percentage from any gain (spread) the index achieves in a specified period.
For example, if the annuity has a 4% spread and the index increases 10%, the contract is credited 6% indexed interest.
| Index Performance | Spread | Interest Earned |
|---|---|---|
| 10% | 2% | 8% |
| 5% | 2% | 3% |
| -5% | 2% | 0% |
Below are today’s best index annuity rates based on annual point to point with a cap using the S&P 500. It is impossible to list all of the available indexes and crediting strategies in a single table. For more complete index annuity rates visit our online fixed index annuity store.
Earnings within an annuity contract are tax deferred. This means you do not pay income taxes on the earnings until you withdraw gains from your account. Therefore, there are no annual 1099 forms to file or earned-interest entries to make on your 1040. Tax deferral also means that annuity earnings do not offset Social Security benefits as with earnings from bonds, CDs, and other investments.
Fixed index annuities may credit higher interest rates than bank CDs or fixed interest rate deferred annuities.
Investors who have maximized contributions to their qualified retirement plans (i.e. 401k, IRAs, and pensions) are permitted to contribute without limit to a tax-deferred annuity.
When interest rates trend upward, annuity accounts are insulated from loss of principal; increasing interest rates often negatively impact government bonds and bond mutual funds. Unlike bonds which lose principal value during periods of rising interest rates, the account value of a fixed index annuity is guaranteed.
Annuities can offer valuable tax-savings for employees under the age of 59½ who receive large, lump-sum distributions from their 401(k) profit-sharing plans as part of an early retirement or severance package. Such amounts can be “rolled over” into an annuity policy without having to recognize taxable income.
Retirees over the age of 70½ are required to begin taking withdrawals from their IRA or Pension plans, known as Required Minimum Distributions (RMDs). The IRS penalty for not doing so is a substantial 50% of any amount that falls short of the Required Minimum Distribution.
By “annuitizing” your IRA or fixed index annuity, you can exchange its value for an “immediate annuity” income stream in any of several forms (see earlier discussion on “Immediate Annuities”).
Fixed Index Annuities pay full account value at death directly to your elected beneficiary avoiding probate.
Your indexed interest is credited to your fixed-indexed annuity at the end of each term. Any interest credited to your fixed-indexed annuity is locked in and protected from future market declines, “What Goes Up Doesn’t Have to Come Down.”
Some fixed indexed annuities offer optional riders such as living benefit riders (Long Term Care Riders) for guaranteed lifetime income or enhanced death benefits to aid with legacy planning.
When you purchase an indexed annuity you can spread your money amongst all of the available options or place it all into any of the available options. In addition, you have the ability to re-allocate among the available options each year your contract anniversary (typically a 30 day window at each anniversary).
Yes. Insurance companies as a whole have a long history of stability, even through our nation’s most difficult economic times. Fixed index annuities, unlike variable annuities, are backed by the full faith and credit of the issuing insurance company.
Fixed index annuities are a type of fixed annuity that earns interest based on changes in a market index, which measures how the market or part of the market performs. The interest rate is guaranteed to never be less than zero, even if the market goes down. The return earned in a variable annuity isn’t guaranteed.
Fixed Index Annuities are a type of fixed annuity that offers a change to earn more when the markets perform and downside protection from potential market downturns.
In the broadest terms, an annuity is a contract between you and an insurance company, where you make a premium payment(s) in exchange for the benefits defined in the contract.
A fixed index annuity does not have any upfront fees or sales charges; meaning 100% of your purchase amount is credited towards your account value. Additional riders may be added for an annual fee on some indexed annuity contracts.
Most indexed annuities offer 10% free withdrawal of your account value annually. Additionally, most index annuities come with a nursing home and terminal illness waiver that make your annuity 100% liquid should become diagnosed with terminal illness or confined to a facility.
