What are fixed index annuities and how are they different from traditional annuities? Great question! Well, an indexed annuities performance is linked to stocks, such as the S&P 500. While traditional annuities have a guaranteed rate of return from the insurer or insurance company. Traditional annuities are great products if an individual wants to know exactly how much money they are going to get out of their investment over a certain number of years. An index annuity on the other hand is usually set up to where the rate of return is based on stock market performances. Here is where it gets really interesting. In a properly structured fixed index annuity the insurance company will usually put a floor of 0%, doing this protects the insured from losing any money. What does this mean? Well, this means that the insured will take advantage of the up side of the stock without taking any losses on the down turn. Essentially, it’s the best of both worlds! Now that being said, the insurance company needs to stay in business. They do this by putting a cap on how much the rate of return is, for example the insurance company may put a cap of 8.5% but the stock that the annuity is indexed to may outperform the cap and have a rate of return of 12.5%. The insurance company would profit off the additional 4%.
Fixed index annuities are great for retirement! An individual can fund an fixed index annuity a few different ways, they can make multiple payments over a period of time, make one lump sum, or they could simply roll over their retirement fund. The reason for the annuity dictates how someone like me will set the annuity up for retirement or for your future legacy. My job is to communicate with my clients and come up with a complete strategy to create, grow, and preserve their legacy and retirement. When you’re ready to start taking money out, you can convert your fixed index annuity balance into a stream of future income. These payments can last for a fixed period of time, like 20 years, or for the rest of your life. The amount you’ll receive depends on your account balance, your investment return and how long you want the payments to last; a longer period means smaller monthly payments.
Alternatively, you could also make a lump sum withdrawal or take all your money out at once, but this has some downsides. Annuities typically have a surrender period that lasts between five to seven years after you bought the contract. If you take out a lump sum withdrawal, the annuity company could charge this fee, which is usually around 7% of your withdrawal, though it may decrease each year you hold an annuity. Consider this surrender period before signing up as fixed index annuities are supposed to be long-term contracts. If you’re under age 59 ½, you may also be subject to a 10% penalty by the IRS for early withdrawals.
It is always important to plan ahead so the road to financial stability is laid out, having a map to success is extremely important. Annuities are a really useful financial tool to have in one’s preverbal toolbox. What most people don’t realize is that with new technology and medical advancements people are outliving their money, which is a huge concern. We all need to plan for success no matter what life throws at us. It is better to be prepared and not need it than to need it and not be prepared.
Ryan Begley
Benefits Specialist
704-218-9223
