/// By Aviva Sapers and Kim Bernabeo Landry
Amid the economic uncertainty and volatile stock market of recent years, many are looking for ways to ensure a steady income stream throughout retirement. With the diminishing existence of employer pensions and uncertainty about Social Security programs, people are looking for new approaches to share in some of the earning potential of the stock market without as much of the risk. Annuities are rising in popularity to meet this need, and the newer Fixed Index Annuity is specifically designed to provide upside returns while helping to protect a portfolio from market declines.
In general terms, an annuity is an insurance contract between an individual and an insurance company where the purchaser pays a premium in exchange for guaranteed payout options for a set period of time or for the remainder of life. There are two categories of annuities: immediate and deferred:
- With immediate annuities, the insurance company provides a series of guaranteed payments that begin right away.
- With deferred annuities, you make one or multiple payments over a longer period of time, allowing monies to accumulate interest.
There are three types of deferred annuities: fixed, variable and fixed index. While traditional fixed annuities provide a steady, guaranteed interest rate for a specific number of years, variable annuities can possibly provide market returns on your investment — at the cost of greater risk. Fixed index annuities (FIAs) combine some of the characteristics of both.
The primary benefit of a traditional fixed annuity is the guaranteed interest on your principal. The main benefit of a variable annuity is the potential for higher uncapped growth tied to riskier market fluctuation. FIAs can be attractive for those approaching retirement because of the principal protection they provide coupled with the potential to earn higher interest than traditional fixed annuities, CDs, or banks—essentially providing some of the benefits of the stock market while helping to protect the loss-risk.
An FIA earns interest on the principal up to a capped amount, based on the performance of an external market index such as the S&P 500. If the index goes down, the insurance company has purchased options on that index such that they don’t lose money. In years that the market performs well, the FIA purchaser will be credited earnings on their investments, but in years where the market drops, the FIA won’t credit the account any additional interest, but also won’t lose previously accrued interest or principal amounts.
For those readying for retirement and looking to guarantee a portion of income for the years ahead, an FIA may be a strong option for helping to protect your assets while leaving room for growth. If you’d like to see if an FIA could match your situation, reach out to discuss options and parameters of your risk tolerance and financial goals.
Fixed Index Annuities (FIA) are tax deferred products; they are not tax free. When withdraws are made from an FIA – the portion of the withdrawal that is not principal will be taxed at applicable income tax rates. Premature distributions (before age 59 1/2) may be subject to an IRS penalty of 10%, in addition to applicable income taxes. Tax-qualified assets (e.g. IRA or Roth IRA assets) in FIA’s may not be eligible for additional tax benefits. Investors should have adequate resources to cover liquidity needs. FIA’s are not: a deposit of any bank; FDIC insured; insured by any federal government agency; or guaranteed by any bank or savings association. Riders and guarantees may be available at additional cost and may not be available in all States. Guarantees are based on the claims paying ability of the issuing company. Investors cannot invest directly in an index.
Kim Bernabeo
Director, Insurance Underwriting Advocacy
Sapers & Wallack