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Fixed Index Annuities

Fixed Index Annuities

What is a Fixed Index Annuity?

A fixed index annuity is a type of annuity that grows at the greater of a) an annual, guaranteed minimum rate of return; or b) the return from a specified stock market index (such as the S&P 500®), reduced by certain expenses and formulas. At the time the contract is opened, a term is chosen, which is the number of years until the principal is guaranteed and the surrender period is finished.

Top Fixed Index Growth Annuities

Midland National

RetireVantage 10

American Equity

AssetShield 10 with Enhancements

Athene

Ascent Accumulator 5, 7 & 10

Midland National

Midland National Summit Edge 5 & 7

What’s an Illustration?

Top Fixed Index Income Annuities

AIG

Assured Edge Income Builder

Nationwide

New Heights 9 & 12

National Western

Income Outlook Plus

Protective

Guaranteed Income Index Annuity

Athene

Athene Ascent Pro 10

Symetra

Symetra Income Edge

What’s an Illustration?

Advisor Insight

Derek Stamos

Licensed Professional

Fixed annuities are often overlooked due to bells and whistles associated with index annuities. A Multi Year Guaranteed Annuity (MYGAs) pays a constant and guaranteed rate of interest each year during the selected period. The investor can spend the interest as income or allow it to compound inside the contract in a tax deferred basis. The simplicity and predictable outcome allows for many different uses including RMD distributions, wealth transfer and accumulation. As with any annuity contract it is important to understand the differences between the products. The most common mistake is taking the highest interest rate without factoring the liquidity provisions and duration of commitment.

Articles & Reviews

Product Review:
Midland National Summit Navigate 7

The Midland National Summit Navigate 7 is, in large part, a combination of a growth FIA and a plain vanilla fixed annuity. One FIA Today Takes a Novel Approach Arguably Better Suited for the Times If you like annuities, the case can be made, at least ostensibly, that this is a good time to buy …

Product Review | United Life Legacy Accel Indexed Universal Life Insurance Policy

Legacy Accel is fundamentally a generous cash alternative capable of generating up to about 7.5% a year by investing in a low volatility index or the S&P 500, based on its performance over the last five years. United Life’s Legacy Accel May Be a Profitable Haven in Today’s Difficult Investment Environment No question, this is …

Inflation is Back, Impacting Retiree Investment Strategies

Fixed annuities seldom yield much more than 3% a year, which means your real return – the return after inflation – is essentially zero. Instead, retirees should consider growth-oriented fixed indexed annuities (FIAs) and/or so-called structured annuities. Plain vanilla fixed annuities are out. Instead, retirees should strongly consider investing in growth-oriented fixed indexed annuities (FIAs) …

From Our Blog

Protect Against Market Volatility With Guardian’s New Annuity

One of the leading providers of life, disability, dental and other benefits in the U.S., Guardian life Insurance Company of America, has just launched a new fixed indexed annuity with an optional guaranteed living benefit rider.  In an effort to help mitigate market volatility and longevity risk, the company introduced the Guardian Secure Index Annuity, …

Capital Protection and Steady Returns with Reliance Accumulator

Reliance Standard Life Insurance Company recently launched a new fixed index annuity product for individuals looking to protect capital while generating steady returns. The company, which was founded in 1907 and is rated A++ by A.M. Best and A+ by Standard & Poor’s, says their new Reliance Accumulator™ builds on the success of Reliance Standard’s …

New Fixed Index Annuity Suite from North American

One of the largest issuers of fixed index annuities (FIAs) in the United States, North American Company for Life and Health Insurance, has teamed up with Annexus to release two new innovative retirement solutions. According to a recent press release, North American Secure Horizon is a “highly competitive accumulation FIA in today’s low-interest environment,” while …

Fixed Index Annuities Defined

Overview

A fixed index annuity (also known as a hybrid or equity index annuity) is a type of annuity that grows at the greater of a) an annual, guaranteed minimum rate of return; or b) the return from a specified stock market index (such as the S&P 500®), reduced by certain expenses and formulas. At the time the contract is opened, a term is chosen, which is the number of years until the principal is guaranteed and the surrender period is finished. In a robust stock market, you will not achieve the actual performance of the index due to the formulas, spreads, participation rates, and caps applied to fixed index annuities, as well as because of the absence of dividends (see below). However, in a down market you won’t ever lose principal (provided the underlying insurance company stays solvent, and to date no insurance company has ever failed to pay out on a fixed annuity). Many investors find that fixed index annuity returns more closely approximate CDs, traditional fixed annuities, or high grade bonds, but with the potential for a small hedge against inflation in an up market.

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Fixed vs. Fixed Index Annuities

Technically speaking, fixed index annuities are a type of fixed annuity. But a fixed index annuity is different than a standard fixed annuity in the way that earnings are credited to the annuity. For a standard fixed annuity, the issuing insurance company guarantees a minimum interest rate. The focus is on safety of principal and stable, predictable investment returns. With fixed index annuities, the contract return is the greater of a) an annual minimum rate, or b) the return of a stock market index (such as the S&P 500®), reduced by certain expenses and formulas. If the chosen index rises sufficiently during a specified period, a greater return is credited to the owner’s account for that period. If the stock market index does not rise sufficiently, or even declines, the lower minimum rate is credited (usually 0% – 2%). The owner is guaranteed to receive back at least all principal less withdrawals (provided of course that the owner has held the contract for the minimum period of time specified in the contract).

Participation / Index Rates

The participation rate, also known as the index rate, is the percentage increase in the index by which a contract will grow. For example, if the participation rate is 75% for a fixed index annuity that is based on the S&P 500®, and the S&P 500® increases 10% for the year, the contract would be credited with 7.5%. The participation rate is usually less than 100%. The participation rate will vary based one the length of the term and on your contract. Note: Dividends are never included in the total return of fixed index annuities. For example, if the S&P 500® was up 10% based on the points gain of the market, the total return may actually be higher once you factor in dividends. Over time dividends have made up as much as 40% or more of the total return of the S&P 500®. It is important to know that you will be forgoing dividends in exchange for principal protection on all fixed index annuities.

Floor & Cap Rate

The floor refers to the minimum guaranteed amount credited to the account. At the time of this writing (see Update date at the bottom of this page), this rate is almost always between 0% – 2%. The cap rate is the annual maximum percentage increase allowed. For example, if the chosen market index increases 35%, and the contract has a 10% cap, the increase will be limited to 10%.

Some contracts do not have a cap rate (these tend to have a lower participation rate, such as 30% to 50% compared with 75% to 100% for a plan with a cap rate). The cap varies depending on the length of your term — fixed index annuities with longer commitment periods (surrender periods) tend to have a higher cap rate, whereas annuities with shorter surrenders periods tend to have a lower cap rate. NOTE: The cap may reset annually and is subject to change at each renewal.

 Index Credit Period

There are four basic ways in which amounts are credited to an owner’s contract at specific points in time:

  • Annual reset: this measures the change in the market index over a one-year period.
  • Point-to-point / term: similar to the annual reset, but the period is usually five to seven years.
  • Annual high water mark with look back: the highest anniversary value is used to determine the gain.
  • Monthly averaging: you have 12 “month-a-versary” points throughout the year, and at the end of each year the insurance company adds them up and divides by 12.

For an example of each of these index credit periods, click here.

Fees

While there are no up-front commissions charged when purchasing a fixed index annuity, depending on the product, the caps, participation rates, and spreads can be onerous. Surrender charges may be imposed if withdrawals in excess of a certain amount are made (usually 10% per year) or if the contract is surrendered completely.

Surrender charges can be as high as 10% on non-bonus contracts and 22% on bonus contracts. Surrender charges typically decline over time, usually by 1% per year. For more information on surrender charges, click here and look under “Liquidity Options.”

Regulation

Fixed index annuities are considered to be fixed annuities by law and as such they are not typically issued by prospectus (a document which provides detailed information on how an annuity contract works, the risks involved, and all expenses or charges). Nor are fixed index annuities typically regulated by FINRA or the SEC (under certain circumstances, an insurance company may register a fixed index annuity product with FINRA or the SEC). If a fixed index annuity is registered, a prospectus must be provided to the buyer. Only individuals with both securities and insurance licenses may sell registered fixed index annuities.

Other Features

Some fixed index annuity contracts offer, as an optional feature and for an additional fee, a guaranteed death benefit and/or a guaranteed lifetime withdrawal benefit (GLWB). In the death benefit, if an annuitant dies before annuity payments begin, the contract will pay the named beneficiary(s) the greater of the investment in the contract (less any withdrawals), usually compounded at 4% to 5% annually through the date of death.

With the GLWB, the principal will usually compound at 6% to 8% for a minimum of 10 years, at which point the owner can begin to withdrawal (usually 5% at age 65, for life).

What is a Hybrid Annuity

Sometimes index annuities are referred to as Hybrid Annuities. The term ‘hybrid’ refers to multiple benefits and crediting options that are normally associated with the purchase of a fixed index annuity. With due diligence a ‘hybrid’ or index annuity can be a powerful investment vehicle that provides index growth and lifetime income. In short, hybrid and fixed index annuities are the same.

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