Home / Blog / Fixed Indexed Annuities Offer Interest Crediting, But It’s Often Capped

Fixed Indexed Annuities Offer Interest Crediting, But It’s Often Capped

Fixed indexed annuities have emerged as an alternative to fixed annuities that overcome the traditional fixed annuity objections.  People are looking for different types of retirement income solutions and Think Advisor’s “Using Fixed Indexed Annuities for Retirement Income” says that indexed annuities are meeting these demands.  William H. Byrnes and Robert Bloink said in their article that indexed annuities are a strong fixed income alternative because of their newer features and the current market forces.  Returns have been better than investments that are considered safe and your principal is still completely protected.

The interest crediting offered by fixed indexed annuities is what many people find as a major benefit.  Your return is linked to one or more stock market indices.  The difference between directly investing in stock markets is that your principal is protected with an indexed annuity.  Keep in mind that your gains are typically limited.  One of the decisions you make when purchasing a FIA is which interest crediting feature you want.  The annual reset, also known as the rachet method, is very common.  This method takes into account the percentage change in the index over the course of the year.  If your index is higher at the end of the year than the beginning, you are credited with that interest.  If the index is lower at the end of the year, you don’t receive a credit but you also don’t lose anything.  Some of the other interest crediting methods credit your interest at the end of an investment term.  If your index loses value right before the term is up, you lose out on any gains you might have had earlier in the term.  The high water mark and point-to-point methods have this downside as well as the potential to lose out on a gain if you surrender your product early.  The authors of this article believe that the annual reset method offers a consistent way to measure gains over the contract’s life.

This method, however, can have lower cap and participation rates than some other indexed annuity products.  Indexed annuity products are capped at a certain interest rate to protect the insurance company.  If your cap is 8% and the index rises by 10%, you will be credited with 8% interest.  In addition to caps, most indexed annuities also have a participation rate associated with them.  Many experts recommend fixed indexed annuities with participation rates of 90% or higher.  If your participation rate is 75% and the index rises by 10%, you will receive a 7.5% gain.  Even with participation rates and caps, fixed indexed annuities can be valuable solutions for creating retirement income because of their principal protection and market exposure.

Written by 

Follow Rachel, aka Finance Mama, on Twitter and Google+

 

Share Button
Comments are closed.

 

Copyright © 2018 AFYI Holdings Group, LLC. All Rights Reserved. No part of this article may be reproduced without the express written consent of AFYI Holdings Group, LLC.

Annuityfyi.com - Prefooter

× Popup Banner

FIA GUIDE

5 keys to making the right decision

Not Today
× Popup Banner

Discover How to Control Your Financial Future

FREE Download and Newsletter

FIA Guide: 5 Keys to Making the Right Decision

Not Today
× Popup Banner

Avoid Costly Mistakes When Picking Your Annuity

FREE Download and Newsletter

FIA Guide: 5 Keys to Making the Right Decision

Not Today
Share On Facebook
Share On Twitter
Share On Google Plus
Share On Linkedin
Share On Pinterest