The Benefits Of A Fixed Indexed Annuity

In times of prolonged market crashes, some investors grow weary of falling balances and the subsequent stress of seeing one’s hard-earned savings disappear down the rat hole of Wall Street. Some may pull out of the market all together and only get back in after many months or even years of the next market rally, which lures them out of the shadows.

This usually happens after the markets have run a long way up and the emboldened investor ends up buying at what might be the tail end of the next rally. This late-to-the-party investor unknowingly sets him or herself up for another shellacking when that rally fizzles out and turns into another crash. Rinse and repeat a few times and the investor ends up giving back even more money because he’s unknowingly off in his timing of the markets.

The stock market by nature will take back some gains from time to time and even gnaw into principal if the crashes are nasty enough. For those investors who lose sleep when times are bad, there is another way to possibly participate in market upswings yet never expose their principal to negative performance.

A Fixed Indexed Annuity (FIA) is a product sold by an insurance company and is basically a contract between the investor and company. The annuity in this example offers a 1-percent annual interest rate, tax free for the entire seven-year term of the contract, which equals about 7.2 percent at its conclusion; 7.2 percent is not necessarily fantastic, but it’s guaranteed and added to the initial principal.

If it stopped there, I wouldn’t consider it, but there is an added feature called “market participation,” and it works like this:

When your contract becomes valid, it does so on a certain day, and that is “your day.” The S&P 500 stock index is measured on that day, and 12 months exactly to the day, it is measured again. If the S&P index is higher, your account is credited a portion of the increase. Once credited, it can never be taken back no matter which way the market then goes in the next 12-month measuring period.

So if the market crashes by any amount, the money you made from the S&P in the first period is not taken back. Your account remains at that increased balance. They then wait another 12 months and repeat the process, crediting you with any increase but never taking away anything.

If the S&P ends down for the new 12-month period, your account doesn’t decrease a penny. They repeat that process every 12 months, adding a portion of the increase but never reducing it. At the end of the term (in this case seven years), you either get your principal back and the stock market participation amount, or the principal plus 7.2 percent interest rate, whichever is greater.

There may be early withdrawal penalties, but they do allow you to take out up to 10 percent a year after the 13th month without penalty. There are no fees if you don’t violate the minimum withdrawal limitations, and the contract is guaranteed by the underlying insurance company. The participation rate can change on each 12-month anniversary, and annuities are not FDIC insured. Investors should review all the terms and conditions of annuities and make sure you completely understand how they work before investing.

In conclusion, a Fixed Indexed Annuity may be suitable for investors who want their principal and some rate of return guaranteed with no downside movement in the balances.

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Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company. Surrender charges apply if not held to the end of the term. Withdrawals are taxed as ordinary income and, if taken prior to 59 ½, a 10% federal tax penalty. Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated.