What do you think of when you hear the word annuity? For many, they’ve heard biased opinions, but very few actual facts. Every product has pros and cons, and annuities are no exception. However, annuities are gaining popularity and it’s for a reason. Did you know, for example, that in 2016 total fixed indexed annuity sales hit a record-breaking $117.4 billion, 14 percent higher than 2015, according to LIMRA Secure Retirement Institute’s Fourth Quarter U.S. Annuity Sales survey?
Fixed Indexed Annuities, or FIAs, have gained popularity for a few reasons. First, they offer principal protection so that the finds placed in the annuity are protected from downside market risk. Many fixed indexed annuities offer some minimum guaranteed contract values. Additionally, a fixed indexed annuity can earn interest that is based, in part, on an external market index, like the S&P 500. Typically, those interest credits are added to the policy values and can’t be lost due to market downturns. For individuals who tend to have a more conservative tolerance, this can make a lot of sense. In addition, some FIAs often contain features that can provide a lifetime income stream, providing you with a monthly paycheck no matter how long you live.
Fixed Indexed Annuities Details:
- FIAs can offer principal protection from loss due to market declines
- Annuities can be useful products for individuals with a more conservative risk tolerance.
- Many FIAs contain effective income benefits that can provide retirement income
- Annuities have pros and cons, but can make a lot of sense for some individuals
- Many annuities offer liquidity features that allow you to access a portion of the fund during the contract term
- Interest credited to the FIA can be limited by product features such as participation rates, caps and spreads.
- FIAs can be complex, and jargon can be difficult to understand, so your financial advisor can help guide you.
- Withdrawals are typically subject to ordinary income tax, and withdrawals before age 59 ½ may be subject to a 10% early withdrawal federal tax penalty.
Annuities come in all sorts of shapes, sizes and flavors. Be sure to work with your insurance agent or advisor to understand how all the features work before you purchase one.
Annuities are long-term insurance products primarily designed to provide retirement income. Guarantees are backed by the financial strength and claims paying ability of the issuing insurance carrier. Early withdrawals may result in loss of principal and credited interest due to surrender charges. Any distributions may be subject to ordinary income tax and, if taken prior to age 59 ½, an additional 10% federal tax. Additional benefit riders may be offered either built-in or for an additional cost. Although an external index or indices may affect contract values, the contract does not directly participate in any stock or equity investments. An annuity owner is not buying shares of any stock or index.