Protection against loss and lifetime income! How can those guys do that?
Of all the many wonderful features of Fixed Indexed Annuities (FIAs), perhaps the two most significant features are downside protection of our retirement assets from market volatility along with guaranteed lifetime income. Yes, even if you live to be 100 or more and your retirement savings becomes exhausted at age 85, your income can be guaranteed never to end until you do.
So, you’d think this would be music to the ears of most people when an agent describes these two comforting FIA features. Instead, we quite often get a blank stare, as if to say, “how can those guys do that?”
To understand the answer to this question is to understand how insurance works. And yes, FIAs are retirement insurance policies, no different than home, auto, life, health, commercial or workers compensation. Many agents describe FIAs as the opposite of life insurance. Life insurance provides a hedge against not living long enough, resulting in a potential financial void, while FIAs provide a hedge against outliving your money in retirement.
Many people view insurance as a necessary evil because it’s ongoing cost can be a significant part of our living expenses. However, insurance is a brilliant financial concept. Think about what happened when a house burned down before the innovation of insurance. It was usually rebuilt through the help of loving neighbors, also known as labor pooling.
Today, the same concept works, but with the pooling of money instead of labor. When an insurance company has billions of our dollars in assets, it’s not a burden for them to indemnify one of their insured’s when they suffer a total loss of their home, are involved in a catastrophic auto accident, or…outlive their retirement savings.
Furthermore, insurance companies invest the money we give them into long-term investments. This provides them with what they need in terms of profitability, enabling them to provide us with what we need depending on the type of insurance policy. With FIAs, this need is most often downside protection of our retirement assets along with guaranteed lifetime income.