Safe Harbor Financial knows that there isn’t one type of financial product that’s the right fit for everyone. Even within demographic groups, for example, retirees and those nearing retirement age – or veterans receiving military pensions – people’s situations are different. Sometimes financial professionals will recommend certain funds or annuities because it benefits them, not their clients. Financial planners may be commissioned and do not necessarily have a fiduciary responsibility to their clients – but Jim Byrd and his team at Safe Harbor Financial do. This means we have a legal and moral obligation to protect our clients’ assets and make their financial interests our highest priority.
What is a Fixed Index Annuity?
A fixed index annuity (FIA) is an insurance contract offered through insurance companies which allows the purchaser to earn interest on their principal, up to a certain amount, that is based on an external market index, such as the Standard & Poor’s 500 Composite Stock Price Index. When you buy an FIA, you do not own any shares of stock or participate directly in the stock market. Rather, you own an annuity contract. It’s a good idea to speak with a financial professional who can give you an objective viewpoint on whether an FIA could be a good fit for a portion of your retirement assets within your overall financial strategy. The decision to purchase an FIA ultimately depends on your unique financial situation, risk tolerance and financial goals.
What are the benefits of Fixed Index Annuities?
One core benefit of an FIA is its potential for earning market-linked interest without the same exposure to market risk. These annuities are set up to keep the policy owner’s money secure and help protect against inflation. An FIA offers protection of principal from market losses, but it also has the potential to provide higher interest earnings than a traditional fixed annuity.
The tradeoff is usually acceptable for clients seeking a financial tool that will work toward their long-term retirement needs. These annuities are set up to help keep the policy owner’s money secure and to allow for inflation and increases in cost-of-living expenses. Other benefits of the Fixed Index Annuity include:
- the option to divide assets into conservative vs. aggressive strategies;
- tax deferrals;
- the ability to add additional contract riders to provide benefits for income, long-term care and/or death.
Fixed Index Annuities are attractive to those preparing for retirement because of the principal protection they provide and the potential to earn higher interest than other financial vehicles. In other words, you can get some of the benefits of the stock market without as much of the risk.
Could a Fixed Index Annuity be right for you?
If you’re thinking about purchasing a Fixed Index Annuity, here are a few questions to ask yourself:
- What is your goal for the principal you are using to purchase your annuity? Protection from the market? Growth? Both?
- How much risk are you comfortable with?
Additionally, there are several potential costs and limitations to think about before purchasing a Fixed Index Annuity:
- Surrender Charges: The premium you use to purchase an FIA is not liquid, meaning you may not be able to withdraw it from the annuity without incurring surrender charges, which are penalties levied against withdrawals made before the date stated in the annuity contract. Some annuities may not charge if you withdraw small amounts each year; for example, 10% or less of the account value. And for most FIA’s the surrender charge lessens each year until the annuity surrender charge period ends.
- Commissions: If you purchase an annuity from a financial professional, that financial professional earns a commission. Commissions are built into the cost of the product and are paid by the insurance company directly to the financial professional.
- Rider Fees: There are various optional riders that you can purchase with an annuity that provide additional benefits. For example, income riders can enhance your lifetime income stream in various ways. However, riders may come at additional costs.
- Caps: A cap is an upper limit put on the maximum interest rate credited over a certain time period. If the index increase exceeds the cap, the cap is used to calculate the credited interest. For example, if the index increases 10 percent but the annuity had a cap of 3 percent, the annuity would be credited 3 percent.