Fixed Index Annuities… Are They A Good deal?

Fixed Index Annuities(FIA’s)…Are They A Good Deal?

By now, most of you have heard about Fixed Index Annuities (FIA’s)!

The baby boomers, and they don’t even know it, have made FIA’s a very hot topic for at least the next two decades!

The need for certainty, protection against market loses, tax advantages, return potential without market risk, estate planning advantages, and guaranteed income streams make the FIA an attractive story!

The question is, are they a good deal?

Today’s version of FIA was introduced in 1995. Since that time dozens of companies have brought their version of FIA to the market and there will be many more to follow.

The primary reason FIA’s get so much attention comes down to one word: defense. Most pre and current retirees want to defend their principal against market losses, they want to keep pace with inflation, they want to defend against taxation and they want to defend their income. Hence, the insurance industry eagerly introduced the FIA!

The FIA is actually a fixed annuity. The principal is guaranteed and there is a guaranteed minimum.

However, the difference between FIA’s and traditional fixed annuities, is how the returns are paid. Your actual returns are based on the performance of a stock market index, like the S & P 500.

What is most intriguing about the FIA, is the combination of principal guarantees and stock market-linked returns. Most all conservative retirees want to earn more than the 2% – 3% rates currently available. However, they do not want to risk their principal.

With the FIA, if the market is negative or crashes, the worst case is a minimum of a zero return. If the market performs well, the potential returns can be higher.

For pre and current retirees who are considering purchasing an FIA, it’s very important to compare the different plans that are available.

Step 1:

Compare the method in which the returns are calculated (Index Method). There are several methods including: Point to Point, High Water Mark, Averaging, Trigger and Annual Reset. The Index Methods are very competitive and will perform differently based on market conditions.

Step 2:

Compare the plans for participation rates and caps. Participation rates refer to the percentage of the index return the policy will pay. For example, assume that the index has a return of 10% and the policy has a 45% participation rate. The policy would pay 4.5%. Caps refer to the maximum return the policy will pay. For example, some policies will pay a maximum return of 7.75%, even if the index returns are higher.

Step 3:

Check for fees. FIA’s can have zero fees but, depending on attached riders, can have annual fees. It’s vital that you if there are any fees and what they cost.

Step 4:

Compare the terms and withdrawal features. Most plans have terms that last five to ten years and the withdrawal features vary by plan. Some plans will allow for annual withdrawals of 10%, while others use an annual vesting schedule based on earnings.

Step 5:

Choose an insurance company that has high quality investments and is highly rated from all five major rating services: A. M. Best, S & P, Duff & Phelps, Moody’s, and Weiss.

The FIA can be a good deal for those consumers who want guarantees of principal, tax advantages, defense against market losses, and potential for higher returns. However, before you purchase, do your homework! The process proceeds the results! Compare, compare, compare.

Rick Kelly, CSA is Certified Senior Advisor with Futurity First in Colorado. He specializes in helping pre and current retirees to secure and defend their retirements. You can receive a free copy of his report “The Annuity Educator” and “Pinnacle List” by emailing him at or  by calling his 24 hour-resource line at 877-596-8233.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which products/investment(s) may be appropriate for you, consult with your attorney, accountant, financial advisor or tax advisor prior to investing.

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