What is a Fixed Index Annuity?
A Fixed Indexed Annuity is a fixed annuity that can provide a guaranteed lifetime income and interest rate while preserving and protecting your premium. You do not pay taxes on your premium or interest until you take withdrawals or receive income. Unlike traditional fixed annuities, additional interest may be earned based on positive changes in commonly used financial indices such as the S&P 500 or the Dow Jones Industrial Average. Because the annuity you purchase is indexed, your premium and credited interest can never be lost due market downturns.Back to TopHow do I know if a Fixed Index Annuity is for me?
As many financial experts point out, there isn't a perfect investment tool. It is our belief that investors should be safer with their money as they grow older. Our average client is at or nearing the age of retirement and wants to preserve and protect their assets. If you want unlimited growth potential and are willing to assume the risk of unlimited loss, then a fixed indexed annuity is probably not the right choice for you. If you are concerned about protecting your principal and enjoying a reasonable rate of return on your investments, then we feel you should join the Five Rings Financial Family.Back to TopHow do I know a Fixed Indexed Annuity is safe?
A Fixed Indexed Annuity is a contract between you and the insurance company that issues your policy. Fixed Indexed Annuities are monitored and regulated by the Department of Insurance of the state from which they are issued. The annuity is additionally protected by the financial strength and claims paying ability of the insurance carrier. Each state's insurance regulator maintains jurisdiction over the insurance carrier and determines the specific amount and level of protection to which the individual is entitled.Back to TopDo Fixed Index Annuities have fees?
Many advisors will tell you that all annuities have fees. Variable annuities have fees that average around 2.5% per year, but Fixed Indexed Annuities do not have any management or contract administration fees. The primary cost to a fixed annuity is committing the money for a period of time. The insurance company pays brokers and other advisors a commission which does not come from the client's money; the commission is paid from the earnings of the insurance company. As long as you do not select an income rider or take withdrawals in excess of the penalty-free withdrawal amount, you will own your annuity and not incur any fees.Back to TopWill I have access to my money if I need it?Fixed index annuity contracts generally allow for some form of penalty-free withdrawals, up to 10% of the full accumulation value, once each contract year after the first contract anniversary.
Back to TopWhat are the benefits of a Fixed Index Annuity?Choosing the right accumulation vehicle for retirement can be difficult. With so many choices, which product will be right for you?
- On one hand, you want the safety and guarantee of principal and credited interest.
- On the other hand, most people prefer the potential of higher interest by being linked to the market—the return potential that a fixed-rate product cannot offer.
In the past, the choices were either (1) receive the guarantee of principle and a minimum amount of interest, or (2) link to the market with the potential of higher returns, but also accept the downside risk to your principal.
Now you can have the best of both worlds: guarantee of principal and the potential of market-linked growth with no risk of loss of principal due to market downturns. Enter the fixed index annuity concept, a concept designed to help you reach your retirement goals.
Back to TopWhat is the biggest difference between Indexed Universal Life and variable life insurance? Indexed Universal Life policy cash value is not invested in the stock market, and there is no direct link like there is with variable life products. Indexed UL are linked to Indexes such as the S&P 500 Index as a measuring stick. The percentage of increase in the S&P 500 Index - subject to a cap rate or spread - is added to the cash value of the policy.
Indexed Universal Life policies do not participate in the market losses (no negative interest to your policy). The index point from which index growth is measured is reset prior to each new measuring period - at the level where the index finished the prior measuring period. Therefore, if the index goes down, nothing is taken away - but the new measuring period will begin at the lowest index level.
With a Variable life policy, the cash value is usually invested in sub-accounts that are linked directly to the market. The cash value within the variable life policy will go up and down as the market goes up and down. While there is the potential for substantial gains, there is equal opportunity for substantial losses.
Many clients do not want to risk their cash value to market fluctuation, so Indexed Universal Life gives them the opportunity to participate in the index growth without the risk of market declines.
Back to TopWhat makes the indexed-based interest crediting so attractive?
Consumers relying upon investment returns to help them reach their retirement goals know how elusive it can be trying to capture those returns. One appealing aspect of fixed indexed universal life insurance is that the interest crediting works in your favor – similar to fixed indexed annuities. If the index being used declines for the year, you lose nothing, but if it increases for the year, you can capture the entire amount that it increases, up to an annual cap.
Since it’s a very long-term product, carriers can afford a higher cap on fixed indexed universal life insurance than on annuities. In addition, the carrier makes some profit off of the cost of insurance charges, whereas annuities don’t have cost of insurance charges, so the carrier can afford to provide higher caps on the life product. But keep in mind that you can minimize the cost of insurance charges by choosing the amount of insurance appropriately. If your goal is to maximize the retirement impact of the money you are putting into an insurance contract, you want to choose the lowest amount of insurance that your premiums will buy. This is often referred to as the minimum death benefit - maximum cash value concept.
Back to TopHow are Fixed Index Universal Life Insurance different from other policies?
The more flexibility in premium payments that a life insurance policy provides (that is, the choice of paying more or larger premiums and when), the greater your potential for tax deferred cash value accumulation. This is exactly how an Index Universal Life Policy works, if properly structered.
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