Fixed Indexed Annuity:
Annuities come in many different forms, and fixed indexed annuities are one of the more potentially complicated ones. Rather than relying solely on a fixed interest rate or the performance of a market index, this annuity combines both opportunities, but also has some of the downside protections one does not get when invested directly in the market. While interest rates are dictated by the insurance company itself, annuitants will be able to choose the index they want their index-linked assets to follow. We can help you understand these products, and in turn explain them to your clients.
What is an indexed annuity?
An indexed annuity is a financial product. It is one type of annuity contract between an investor and an insurance company. An indexed annuity generally promises to provide returns linked to the performance of a market index. There are two phases to an annuity contract – the accumulation (savings) phase and the annuity (payout) phase (Income).
During the accumulation phase, the client will make a lump sum payment to the insurance company. These payments can be allocated to one or more indexed investment options (not directly in the market). The insurance company credits the account with a return that is based on the indexed investment options that the client selected. During the annuity phase, the insurance company makes periodic payments to the insured, or the contract value may be received in one lump sum. This usually needs to be pre-determined at the start of the contract.
Not all indexed annuities are regulated by the SEC. The SEC regulates only indexed annuities that are securities. These indexed annuities can expose investors to investment losses. If the indexed annuity is a security, generally a prospectus will be provided. We only work with Indexed Annuities that DO NOT expose the investor/client to losses.
How does an indexed annuity work?
The amount of money (contract value) in an indexed annuity is based on positive changes, and in some cases negative changes, to the market index. This return is calculated over the course of a specified period of time. These time periods are typically twelve months long, but can vary. Before purchasing an indexed annuity, one should understand how this return is calculated and the extent to which price declines in the index can affect the performance of the indexed annuity.
Indexed annuity contracts describe both how the amount of return is calculated and what indexing method they use. Based on the contract terms and features, an insurance company may credit the indexed annuity with a lower return than the actual index’s gain. In addition, under the terms of some indexed annuities that are securities, more money could be lost in the indexed annuity when the market index goes down than is indicated by the loss of value in the index. The products we offer to you and you to your client all have protection floors.