What are they? How do they work?
What is a fixed index annuity? Don’t let the investment jargon put you off, fixed Index Annuities are simpler than they sound. A Fixed Index Annuity is a tax-favored accumulation product issued by an insurance company. However, unlike fixed deferred interest rate annuities, a Fixed Index Annuity’s annual growth is tied to a market index like the Standard & Poor’s 500 rather than an interest rate.
How do they work? A Fixed Index Annuity can be funded with either a large, one-time sum or regular payments over time. It may be attractive to those looking for an alternate retirement vehicle. That's because certain index annuities are subject to rate floors and caps. In other words, an index annuity can't exceed or fall below a predefined return level, even if the underlying market index performs outside of set parameters.
How is this possible? The insurance company that issues the annuity bears the risk of a potential stock market decline. That's right! With a fixed index annuity, your original deposit can be structured, so it will not decline if the index performs negatively.
Another potential benefit is how fixed index annuities grow over time. Their growth is tax deferred, meaning you don’t pay income taxes until you withdraw money from the annuity. But keep in mind, if you make withdrawals before you reach the age of 59 ½, you may be required to pay a 10 percent federal income tax penalty.
Fees & Expenses. Sometimes, even the savviest investor could use a little guidance. After all, annuities can have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits.
Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contract.
So, if Fixed Index Annuities sound like something that may interest you, don’t hesitate to reach out to a financial professional soon. Who knows? This may just be the retirement vehicle you’ve been looking for.
Ken Weise, an LPL Financial Advisor, provided this article. He can be reached at 707-584-6690. Securities offered through LPL Financial. Member FINRA/SIPC. The opinions of this material are for information purposes only.