Fixed index annuities and equity index annuities are increasingly popular investment vehicles. They offer people a way to earn a fixed income with some potential benefits of investing in stocks without many drawbacks, but they also come with risks and problems that can’t be ignored. This hybrid-indexed annuity review is what you need to know about fixed-indexed annuities before investing your money.
- What Are The Advantages And Disadvantages Of An Indexed Annuity?
- What is a Fixed Index Annuity, And How Do They Work?
- Index Annuity Yields Example
- Fixed Index Annuity Pros and Cons
- Fixed Index Annuity Problems
- Fixed Index Annuity Advice
- Next Steps
- Frequently Asked Questions
- Additional Reading
- Request A Quote
What Are The Advantages And Disadvantages Of An Indexed Annuity?
Some pros of investing in an indexed annuity are that you’re guaranteed retirement income, have the potential to gain more interest, and your premium is protected. However, such advantages often come with a few disadvantages, such as higher fees and commissions or caps on gains.
What is a Fixed Index Annuity, And How Do They Work?
A Fixed Index Annuity, also known as an equity index annuity, is an insurance policy for retirement. The tax-deferred retirement plan allows a consumer to earn interest based on a fixed interest rate or the positive performance of a stock market index such as the S&P 500 and Nasdaq without the risk of stock market losses. Fixed index annuity owners can’t lose money due to a stock market crash because their money is not directly invested in the stock market.
Index Annuity Yields Example
The interest rate you receive on your annuity will be based off the conditions stated in your contract. For a clearer understanding, here’s an image that explains indexed annuity yields.
Fixed Index Annuity Pros and Cons
| Pros | Cons |
|---|---|
| Tax-Deferred Growth | Long-Term Contracts |
| Principal Protection From Stock Market Crash | Limited Upside Potential |
| Earn Interest Based On Stock Market Performance | Complicated Index Strategies |
| Lock-In All Interest Earned (Never Lose Money) | Surrender Charges |
| Better Rates Than CDs and Fixed Annuities | |
| Triple-Compounding Interest | |
| Fewer Fees Than Variable Annuities | |
| Unlimited Contribution Limits | |
| Guaranteed Lifetime Income | |
| Hedge Against Inflation |
The Pros
- Principal Protection: A fixed index annuity allows you to participate in positive stock market performance. Your account value is protected when the stock market goes down.
- Taxes Are Deferred Until The Future: If you own a fixed deferred annuity, you won’t pay taxes on the interest each year. Instead, you will owe taxes when you withdraw the money from your fixed index annuity in the future.
- Compounding Interest: Fixed index annuities usually have triple compounding interest.
- Fewer Fees: In a fixed index annuity, owners will pay a fraction of the fees paid in a variable annuity.
- Lock-In Your Gains And Never Lose Them: You lock in the gains every time you earn interest. You never lose money that you have earned. This is called The Annual Reset Method.
- Guaranteed Income For Life: An income rider offers a flexible retirement income stream that cannot be outlived. It is also known as a Guaranteed Lifetime Withdrawal Benefit (GLWB). Use our annuity calculator to get an estimate of how much it will cost you.
- No Contribution Limits: You can put as much money into an indexed annuity as you want. That may be a good thing for older people trying to save more or who have maxed out their 401(k) and IRA contributions.
The Cons
- Long-Term Contracts: Fixed index annuity Contracts can range from 5 to 16 years in length. The standard length tends to be a 10-year indexed annuity contract.
- Limited Upside Potential: Typically, an indexed annuity will provide better growth than a traditional one. In contrast, if you want to risk losing some of your money by investing in stocks or bonds, you should invest in a variable annuity.
Fixed Index Annuity Problems
- Annuities with premium bonuses can often prohibit long-term growth.
- Caps and participation rates can fluctuate, reducing the ability for consistent growth.
- Most lifetime income riders pay a “level” income that never increases to keep up with inflation.
- Most index strategies are new and complicated. As a result, fewer and fewer traditional indexes (S&P 500, Nasdaq, and Dow Jones) are used.
- Fees can reduce the account value.
Fixed Index Annuity Advice
Most fixed index annuities are great savings plans. However, finding the perfect annuity can be challenging. Utilizing an annuity expert is critical in selecting the right annuity.
Common Fixed Index Annuity Mistakes
- Purchasing an FIA with little to no growth potential.
- Purchasing an FIA for a “bell and whistle.”
- Purchasing an FIA that does not generate the highest income for you.
Next Steps
A fixed-indexed annuity can be a helpful investment for some people looking to earn income in retirement, but it’s not without its risks. Make sure you understand all the potential problems that could arise before investing your money. If you’re still interested in purchasing a fixed-indexed annuity, we can help you get started. Contact us today for a quote.
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Frequently Asked Questions
Can I lose money in an indexed annuity?
Indexed annuities are not investments or securities and do not participate directly in the stock market. Rather, fixed index annuity interest is earned by the performance of an external index such as the S&P 500. The index is a “measuring stick” to determine how much interest can be earned in any given year. Index annuities are guaranteed not to lose money.
What are the advantages and disadvantages of an indexed annuity?
The advantages of indexed annuities include earning interest based on stock market performance without losing money. The disadvantages include limited upside potential compared to the actual stock market.
Are indexed annuities safe?
Indexed annuities are as safe as traditional fixed annuities or multi-year guaranteed annuities (MYGA) because they offer both a fixed interest rate each year or interest based on an external stock market index. Like a fixed annuity, fixed index annuities are guaranteed not to lose money.