How Fixed Indexed Annuities Work

By |2015-05-21T20:40:32+00:00September 8th, 2014|Annuities|

By Bill Broich

Fixed Indexed Annuities are valuable tools for many planning retirement. Along with a company pension and social security, a Fixed Indexed Annuity can provide the basis for guarantees in a retirement plan. Fixed indexed annuities are excellent investments that allow you to enjoy the benefits of interest linked to the market without being affected by market risks.

Also referred to as equity annuities, they are investments that are insured and they are linked to the interest rate. This means that the interest paid on these annuities will be affected by the stock market index. For example, if your fixed indexed annuity is linked to the Standard & Poor’s 500 (S&P) when that stock market index grows, so does your annuity. As long as the stock market index rises, your account will be credited by the insurance company, with their cut coming out of the credit. If the index falls, however, your insurer will protect your investment against any possible loss through positive rate of interest. If the market has a negative year, you will not lose any money from your principal, you will just not earn any interest payments.

This annuity fund is safe and, because there is little risk, it is also very popular. By combining the safety with the opportunity to earn extra interest when the market rises, fixed index annuities offer several good options for investors looking for security. There are other advantages to this type of fund, as well. In addition to being able to take advantage of multiple income streams you have the choice of when you will make your investment and you can also choose the guaranteed income option. The advantages to this type of investment are diverse, but can be simplified to the following list:

    • Fixed annuity. You determine how much you can make and what markets your policy is linked to. This gives you more control over where and how your money is invested.
    • State regulated. Fixed indexed annuities are regulated and approved for sale by the individual States.
    • Principal protection. Your principal is guaranteed and you are protected from losing any policy value. You get to set the percentage of how much of your principal is protected. This protection comes at the cost of a declared cap of how much interest you can draw.
    • Probate advantage. Most fixed index annuities offer death benefits that do not have to go through probate before they are distributed. Your accumulated cash value will be given to the designated beneficiaries without going through court.
    • Death benefits. Your beneficiaries will collect the value of your investments, including the interest that has accumulated, if you pass away before collecting your income payments.
    • Cash access. Depending on your policy, you can generally access up to 10 percent of your principal per year, after the first, penalty free. Withdrawals above the penalty free cap will be subject to a surrender charge. Some policies offer a Return of Premium (ROP) rider. This feature allows you to take 100 percent of the original premium without any surrender penalties. Some companies offer this rider for no cost.

S&P is not the only market these annuities can be linked to, and you can either choose one or a combination of indexes. Another advantage is getting to choose when and how the interest is measured and credited to your account. Fixed indexed annuities provide the users with a steady and guaranteed growth rate over long durations. You can benefit from higher accumulations which are linked to a particular index. This investment option is especially well suited for people who are preparing for retirement or have already retired. This is an attractive option for investors who draw their primary income from pensions.

The primary benefit from this type of account is that you can increase your assets in a very safe way. Basically, these annuities are based on guarantees offered by the insurance company. Your primary source of income is interest payments, there are opportunities, though, to increase the interest as the market does better over the long term and by using an add on feature, income riders. Your money is safe and will not only benefit you, but also your children or any beneficiaries that you want the principal and interest paid to when you pass away. Putting your money to work, for you and your children, with no risk to the balance is a safe and effective way to supplement your retirement.

About the Author:

Bill Broich
Bill Broich is a well-known annuity expert with over 30 years of experience. He has written hundreds of articles on annuities and other financial topics, and has been a featured commentator on TV, Radio and the Internet. To follow Bill's profile, click here.