How Fixed Indexed Annuities Offer Guaranteed Income And Avoid Market Risk
Is guaranteed lifetime income important to you?
Fixed Indexed Annuities (FIAs) are a type of retirement investment that can offer guaranteed income and limit exposure to market risk. Let’s break down what this means in simple terms.
First, let’s talk about what an annuity is. An annuity is a way to save money for retirement and receive regular income payments when you’re ready to retire. An annuity is a contract between you and an insurance company. You pay the insurance company a certain amount, all at once or over time. In exchange, the insurance company promises to give you a certain amount of money back in the future.
Now, let’s talk about what “fixed” and “indexed” mean regarding annuities. A fixed annuity offers you a guaranteed interest rate on your investment. This means you know exactly how much money you will earn on your investment, no matter what happens in the stock market. On the other hand, an indexed annuity offers you a return tied to the performance of indices such as the S&P 500 stock index. This means that if the stock market does well, you may earn more money, but if the stock market does poorly, you would not be exposed to market risk.
So, a Fixed Indexed Annuity combines these two types of annuities. It offers you a guaranteed interest rate on your investment but also allows you to potentially earn more money based on the performance of a stock market index. This works because the insurance company will set a “participation rate” for the index. This is the percentage of the index’s return you will earn on your investment. For example, if the participation rate is 50%, and the index goes up 10%, you would make 5% on your annuity deposit.
Now, let’s discuss how Fixed Indexed Annuities offer guaranteed income and avoid market risk. When you buy a Fixed Indexed Annuity, you can receive income payments at some time in the future. The insurance company will guarantee a certain income based on your investment and age. This means you will receive a certain amount of money monthly, no matter what happens in the stock market. Income can be for any specific time, even a lifetime. Most contracts allow you to include your spouse in the income calculation. Additionally, Fixed Indexed Annuities protect you from market risk because they have a “floor.” This means that your investment will not lose value below the guaranteed amount even if the stock market goes down.
In summary, Fixed Indexed Annuities offer a way to save money for retirement and receive guaranteed income payments while also potentially earning more money based on the performance of a stock market index. They protect you from market risk by offering a guaranteed interest rate and a “floor” to prevent loss of value. However, it’s important to research and speak with a financial professional before investing in any retirement investment.
From time to time, clients ask me for an analogy about what Fixed Indexed Annuities are and how insurance carriers can provide upside potential and growth while insulating the annuity owner from downside market risks. An analogy from the world of real estate investing may help understand the concept. Many real estate investors would be pleased to buy a commercial property and write a lease to gain a predictable stream of lease income by leasing the property to a financially healthy insurance company.
You could think of a FIA as “leasing” your money to the same insurance company that you’d be pleased to have as a tenant in your commercial building. Naturally, you would try to include lease provisions for escalations in the monthly lease payments depending on the success of the future business and economic conditions. Contemporary FIAs feature such terms as being able to receive known income for as long as you and a spouse live. Your income can rise under a variety of economic conditions, and you can withdraw amounts of cash from the FIA to meet changing life situations. The remaining value in the account after you’ve received distributions can be available to your designated beneficiaries.
What many people are doing today is using FIAs to guarantee their core future income needs while insulating those same funds from the risk of market exposure in the equity markets. These people are de-risking their most essential funds’ significant market value downturns that have been a historic part of the equity markets.
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