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.
Safety and Guarantee of Principal
A fixed index annuity (also referred to as an equity indexed annuity) provides you with the best features of a traditional fixed annuity - a guarantee of principal. Unlike most securities or mutual funds where your account balance can fluctuate due to market performance, premium deposited into a fixed index annuity is guaranteed to never go down due to market downturns. A contract owner of a fixed index annuity participates in market-indexed interest without market-type loss.
The Power of Tax Deferral
All annuity values accumulate on a tax deferred basis until withdrawn. Therefore, your money can grow faster because you earn interest on dollars that would otherwise be paid as taxes. Your principal earns interest and the interest compounds allowing you to accumulate more money over a shorter period of time, thereby earning a greater return on your money.
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.
Guaranteed Lifetime Income
Fixed index annuities can provide you with a guaranteed income stream with the purchase of a fixed index annuity. You have the ability to choose from several different annuity payment options. With nonqualified plans, a portion of each annuity payment represents a return of premium that is not taxed, which reduces the income tax on your annuity payments.
Potential of Stock Market-Linked Growth
While the index annuity concept offers many features of a traditional fixed annuity, it has a rather unique feature that allows a potential of stock market-linked interest credits without the potential of any market-type loss. In contrast to a securities-type product or mutual fund where the investor bears the market risk, the fixed index annuity concept insulates the contract owner from any risk of loss of principal due to market downturns.
What is Indexing?
Earnings on a fixed index annuity are based on stock market-like performance from certain indices. But what is indexing? Indexing is simply an investment strategy that follows the performance of select securities, such as the Standard & Poor’s 500® Index. The S&P 500® is a collection of 500 select industry leaders and thus a benchmark for U.S. Stock Market performance. A fixed index annuity is linked to the performance of this type of market index, without the risk of directly participating in stock or equity investments. With indexing, you can participate in a diversified passive investment strategy: a link to the market and its potential gains without subjecting yourself to the potential downfalls of the market.
Expectations for the Fixed Index Annuity
Fixed index annuities have the potential for market-linked interest without exposure to the market risk. Contract owners enjoy the guarantees and safety of principal even while being linked to market growth. However, they should not expect fixed index annuities to mirror the exact performance of any stock market indices.
Since a fixed index annuity uses a passive investment strategy, it will not mirror the exact return of the stock market index. The fixed index annuity is a powerful financial tool designed to meet your long-term retirement needs.
Does it sound like a Fixed Indexed Annuity might be right for you?
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.
Fixed Index Annuities
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.
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IMPORTANT DISCLAIMER: This information is not intended to provide legal or tax advice. Before making any decisions related to the rollover of a qualified account into an annuity, you are strongly advised to consult with proper legal or tax professionals to determine the tax consequences in your financial plan.
Purchasing an annuity within a retirement plan that provides tax deferral under sections of the Internal Revenue Code results in no additional tax benefit. An annuity should be used to fund a qualified plan based upon the annuity’s features other than tax deferral. All annuity features, risks, limitations, and costs should be considered prior to purchasing an annuity within a tax-qualified retirement plan.
Bonus annuities may include annuitization requirements, longer annuitization or surrender charge periods, higher surrender charges, lower interest rates, lower caps, higher spreads, or other restrictions not included in annuities that don't have a premium bonus feature.
Any distributions are subject to ordinary income tax and, if taken prior to age 59½, a 10% federal additional tax.
• Not FDIC insured • May lose value • No bank or credit union guarantee • Not a deposit • Not insured by any federal government agency or NCUA/NCUSIF • Product and feature availability may vary by state and broker/dealer.
Fixed Index Annuities can offer:
- Principal protection
- Tax-deferred growth
- One or more index allocation options
- A choice of crediting methods
- Income options, including income for life
- Death benefit options
- Optional benefits that may help protect your retirement assets and income (available at an additional cost)
How do Fixed Index Annuities work?
- You give the insurance company money in one or more payments.
- The insurance company then invests it on behalf of all annuity owners.
- During the accumulation phase, your annuity will earn a fixed rate of interest that is guaranteed by the insurance company.
- You defer paying taxes on your contract’s interest until you receive money from the contract. Tax-deferred interest means the money in your contract can grow faster.
- After a period of time specified by your contract, you may then receive the amount allowed by your contract in a lump sum, over a set period of time, or as income for the rest of your life. This is known as the distribution phase.
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