Fixed Index Annuities - Good or Bad?
by Hersh Stern - Revised Saturday, November 7, 2015
Uncertain economic times and the need for guaranteed income during retirement may have made you feel uneasy about investing in volatile investments like stocks and bonds. You may be considering a fixed index annuity as a means of providing all or some of your household’s needed income. But, the amount of information available about fixed index annuities can be overwhelming for many. Let’s take a closer look at how this annuity works and how it may or may not benefit you. (See examples of fixed index annuities in the table below.)
Understanding Interest Rate Caps and Floors
The single largest benefit to a fixed index annuity is principal protection. Interest credits are deposited into the annuity account annually based upon the underlying index’s performance. Most fixed index annuities provide you with an interest credit floor, meaning the percentage deposited into your account annually will never fall below this figure, despite the performance of the underlying index. Additionally, the insurer guarantees the investor’s premium deposit will not decline in value.
Fixed Index Annuity table
|Company / Product||Cap Rate||Bonus||Yrs.|
|Midland NationalSelect 14 Annuity||6.05%||N/A||14|
|Great AmericanAmerican Legend III||5.00%||N/A||7|
|SymetraSymetra Edge Pro 7||5.00%||N/A||7|
|ProtectiveProtective Indexed Annuity II 7||5.00%||N/A||7|
|ProtectiveProtective Indexed Annuity II 5||4.55%||N/A||5|
|SymetraSymetra Edge Pro 5||4.25%||N/A||5|
This is a table illustrating today's top interest rates for fixed index annuities. The table lists the name of the insurance company, years that surrender charges would apply, and the premium bonus, if any. To learn more about deferred annuities click any line in the chart or call 800-872-6684 for quick answers.
To balance this out, fixed index annuities include rate caps, placing a ceiling on the amount of interest growth to be deposited during any given investment year, even if the underlying index outperforms this figure. In addition to rate caps, due to the nature of an annuity, you will not participate in the underlying stock index dividend payments. This is one of the biggest concerns advisors have with fixed index annuities; the perceived limited upside potential for your investment.
Fixed Indexed Annuities - Other Considerations
One of the benefits of annuities in general is tax-deferred growth. You are not taxed on the growth of your premium deposit until it is withdrawn at a later date. Annuity withdrawals are taxed as ordinary income. This is in contrast to the interest earned on a bank certificate of deposit which is taxed even if you don't withdraw it.
Annuities are designed to provide income at a future date to the contract owner. Therefore, they should be considered long-term, illiquid investments. Most contracts include a surrender schedule for varying period of time following premium deposits. Once the noted time period has passed, you can access your funds without these fees.