• Basics of Fixed Indexed Annuities

  • Financial Mistake: Overlooking the advantages of a fixed indexed annuity for your retirement accounts.

    Basics of Fixed Indexed Annuities (also called FIAs):

    1. A fixed indexed annuity is a vehicle in which a life insurance company holds your money, providing certain contractual guarantees*. They are financial vehicles that allow you to park your money and let it grow without market risk. These differ from variable annuities,** "(where cash values could be subject to market risk) or immediate annuities (that require an irrevocable decision to convert assets to a series of payments in exchange for cash values). With a fixed indexed annuity, you have a cash accumulation value that grows without market risk, and with most FIAs you are not require to trade your cash value for an income stream (this is only an option). In general, you have the option to withdraw money as you please (see #6 below) or leave it there to let it grow.

    2. Annuities can hold IRA or non-IRA money**. You can fund the annuity with cash from a checking account or bank, or you can start an IRA or roll over money from an IRA or 401(k). Rolling over a 401(k) or IRA to an IRA annuity is generally a non-taxable event**.

    3. Fixed indexed annuities are tax deferred*** (or possibly tax-free if your annuity is a Roth IRA), allowing you to control when income taxes are due. For IRA money, having your money in an annuity presents no additional tax benefit (of course, the annuity may offer other benefits than a tax advantage). For non-IRA money, tax-deferral offers a distinct advantage over many alternatives where you must pay taxes annually on earnings. Non-IRA annuities can defer income taxes to a very old age, and there is currently no IRS limit as to how much money you can contribute into a non-IRA annuity.*****

    4. Your principal is guaranteed* and, once earned, your interest is credited to principal and guaranteed from market risk. Many alternatives for your money may not offer such guarantees.

    5. You can earn interest linked to a stock or bond index, but you are not invested in the index.

    This eliminates your risk of your annuity's value decreasing due to investment downturns. Many fixed annuities also allow you to allocate part or all of your money to a fixed interest rate not linked to an index.

    6. Most contracts offer 10% penalty-free withdrawals after year one****. Other financial vehicles without this provision could cause you to have to sell at a loss to receive income. If you withdraw more than the penalty-free amount available from a fixed indexed annuity, there would be company penalties (usually in the first 5 to 15 years, depending on the contract). These penalties are put in place to prevent insurance company losses and ultimately protect the policyholder. With some contracts, there is additional penalty-free liquidity if the owner enters a nursing home or is unemployed*.

    7. Some contracts offer interest bonuses for each premium*. Bonuses are typically not available as cash, but rather they are credited to your policy values, increasing the amount of compound interest earned.

    8. Because costs are built into most fixed annuities, many only charge additional fees when an optional rider has been selected by the contract owner (such as an income for life withdrawal benefit, enhanced death benefit, or enhanced interest option).

    9. When positive movement of an external index occurs over a period of time, typically one year, fixed interest is credited to your contract value. This is attributed to the annual reset feature (see section entitled Annual Reset). Credited interest will usually be less than the full index gain of the external market index.

    10. The portion of index linked interest that you could receive is determined by the crediting methods and indexes selected. Caps, spreads or participation rates are used within crediting methods used to deter-mine the portion of index gains credited as fixed interest. These are declared annually by the company and subject to change. Ask your Future Benefits agent about the details of each contract.

    11. When negative movement of an external index occurs over a period of time, typically one year, principal is not reduced (unless your contract has some sort of fee). If you remain linked to the same index following a negative year, the lower index value then becomes the starting point for the upcoming con-tract year. This attributed to the Annual Reset feature. The may provide opportunity the year after a decline on the index.

    12. Most fixed indexed annuities can provide a guaranteed lifetime income for you, your spouse, or both. These lifetime income benefits continue even if the cash value of your contract is depleted. These riders provide guaranteed growth (example: 5% to 7% annually) for the purpose of providing a guaranteed life-time income (see Guaranteed Growth & Lifetime Withdrawal Basics).

    13. Most annuities provide beneficiaries an immediate death benefit free of any surrender penalties. Usually spousal beneficiaries have the option to continue the contract and become the new owner. This waiver of penalties at death eliminates the concern for many of buying an annuity at an older age. In fact, older clients should understand that many annuities can not be obtained after age 80 or 85, putting a deadline on obtaining valuable benefits.

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    *Guarantees are backed by the claims paying ability of the insurance company issuing the contract. With the purchase of any additional cost riders, the contract's values will be reduced by the cost of the rider. This may result in a reduction of your principal in any year in which the contract does not earn interest or earns interest in an amount less than the rider charge. Withdrawals in excess of penalty-free amounts may cause surrender charges. Information in this section is meant to be general as details and guarantees of fixed annuities vary from contract to contract. Consult your agent and company material on each particular contract. We are not stock brokers or financial advisors and do not give investment advice. We are not tax advisors and do not give tax advice. We are not attorneys and do not give legal advice. Note that distributions from traditional IRAs prior to age 59 &1/2 are taxed as ordinary income and may be subject to a 10% IRS federal tax penalty. Note that interest distributed from non-IRA annuities and Roth IRAs are subject to ordinary income tax and may be subject to a 10% IRS federal tax penalty.

    See our Professional Disclaimer