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Don’t Purchase A Fixed Indexed Annuity Until You Know These Details

Fixed indexed annuities offer principal protection and the potential to grow your money if stock market indexes increase.  They are a helpful tool to use when financing your retirement.  But they can be complex and you need to make sure that you understand all of their pieces and parts.  In the CBS Moneywatch article, “6 questions before buying a fixed indexed annuity,” Allan Roth helps to explain the details of indexed annuities and lets you know what to look out for.  Fixed indexed annuities are also referred to as equity indexed annuities and have been increasing in popularity over the past few years.  Sales increased 39% from the first quarter of 2013 to the first quarter of 2014.

Allianz Life is the top seller of fixed indexed annuities.  They simply describe the products as an agreement with an insurance company that can help you to meet your financial goals.  After paying your premium, you can start receiving income immediately or defer it until after an accumulation phase.  They list the benefits as tax deferral, guaranteed income, death benefits, accumulation and the potential to earn indexed interest.  With the Allianz Core Income 7 Annuity, your account increases if the index to which it is linked increases.  The value is capped by the insurance company though.  As long as you don’t take money out during the seven year surrender charge period, your principal is protected from any losses than might occur in the index as well.  Fixed indexed annuities offer excellent benefits, but it is important to ask these questions before purchasing a product like this that has a lot of moving parts.

The first question to ask is what your increases will be capped at.  The Allianz Core Income 7 is capped at 4.5% right now.  If markets are down or flat, you will not receive an increase.  If markets rise, you will receive an increase up to 4.5%.  Any higher increases in the markets will still result in a 4.5% increase to you.  That is your trade-off for the protection you receive in the case that markets decline.  In the fine print of your annuity contract, the insurance company might be able to lower the cap in the future.  Allianz reserves the right to lower the cap to as low as .25%, but insists that it would have to be a global financial catastrophe before they would make such a move.  Ask your insurance company if you will receive the total index return or only the price appreciation.  Your return will be very different if the dividend portion is stripped out.

Whether or not you pay less in taxes is dependent upon how and when you take your money out.  The taxes on interest you are credited is deferred.  If you cash out at any time, all of your interest will be taxed the same year though.  This is why fixed indexed annuities are best used as long term products to generate income in the way originally intended.  The article recommends asking your insurance company if some of your income comes from a return of your principal.  The answer is that yes, your principal is returned first and followed by interest.  The point of most annuities is that they guarantee lifetime income, so if you live a very long life you will not run out of money.

As with any annuity product, it is crucial to know your surrender charges.  The Allianz Core Income 7 charges 8.5% in the first year and goes to a 3% surrender charge by the seventh year.  This is one of the lowest charges for fixed indexed annuities.  They also offer a free 10% surrender in case you need money for an unforeseen circumstance.  Sometimes annuity commissions can be high, so it’s also fair to ask your insurance company about those fees and commissions.  Fixed indexed annuities are useful tools when used correctly, but it’s important to know all of the details before making a purchase.  Annuity FYI offers our own annuity warning questions to ask before purchasing a fixed indexed annuity.  The questions are similar and can help you decide if these annuities are right for your financial plan.

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