Fixed indexed annuities have been steadily increasing in sales recently. While they don’t make up the largest portion of annuity sales, they are quickly gaining ground on variable annuities and now make up more than half of all total fixed annuity sales. Despite this fact, indexed annuities are often misunderstood and can get a bad rap from some financial experts. The Wharton School at the University of Pennsylvania’s David F. Babbel, a professor of insurance and finance, studied fixed indexed annuity products for two years. His in-depth research, performed with a team of Ph.D. economists and senior actuaries, uncovered some important truths about indexed annuities. Peggy Bresnick summarized ten of the most important findings in “FIA facts: 10 fixed index annuity truths,” an article for LifeHealthPro.
First of all, they found that all annuities appear to be wise investments, including fixed indexed annuities. Babbel said that it is hard to argue against using an annuity product as an income solution because of the list of benefits offered. Three benefits he listed are guaranteed income payments that last for the rest of your life, legacy payments and access to your investment capital. The second benefit is that your earnings are linked to a stock market index that allows for market upside potential. But fixed indexed annuities also protect your money from market downsides, unlike investing your money directly into the stock market. Fixed indexed annuities have performed great in the markets since they were introduced as a mutual fund alternative back in 1995. They have performed better than the combination of corporate and government bonds, money markets and equity mutual funds.
The fourth indexed annuity truth listed is that indexed annuities can earn you good money in the markets. With their caps and participation rates, fixed indexed annuity products don’t offer the dramatic returns that direct investments can, but their market downside protection coupled with moderate returns can offer a better performance than direct market investments over time. The annual reset feature is another benefit of fixed indexed annuities. Each year, the annuity’s indexed value is reset with the current annuity value including any interest earned that year. That total becomes the starting value the next contract year. The sixth benefit listed is the guaranteed lifetime income you get from indexed annuities. Your annuity grows at a guaranteed rate during the deferral period then pays you income for life, even if your accumulation value runs out. Payments are determined by your age and the contract value in your income account when you start receiving income. You also maintain control over your accumulation value and fixed indexed annuities have low or even no fees attached.
Your particular index linked interest rate depends on a few different things. The participation rate is how much of the actual index gain your account will be credited. Some indexed annuities use a margin/spread/asset fee instead, which is a percentage that will be subtracted from the market gain. There may also be a cap on the amount of market gains that you can receive in your fixed indexed annuity account each year. Pay close attention to these three things when researching an indexed annuity. NAFA determined that the most common reasons for buying fixed indexed annuities are saving money for retirement, having money to give business partners, family or charities upon death, and saving for planned or unplanned expenses.
The ninth annuity truth is that all annuity products are backed by the claims paying ability of the insurance company who sold the annuity. Choose an insurer with high financial strength ratings that will be able to back up their payments. Finally, the majority of people who have purchased an annuity product are happy with their purchase. Studies have shown that 9 out of 10 annuity owners think that annuities are an effective way to save for retirement and create a retirement income stream. Fixed indexed annuities offer many benefits that are often misunderstood. These ten annuity truths about fixed indexed annuities are important for anyone considering an annuity to understand. Speak with an expert at Annuity FYI if you have any questions about the benefits of fixed indexed annuities.
Written by Rachel Summit