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Pros and Cons of Fixed Indexed Annuities

The pros and cons of any product are directly related to how you use that product.  With fixed indexed annuities it all depends on your goals and whether this type of annuity can help you meet those goals.

And when it comes to solving retirement problems, in every case there exists a “best” way to get things done.  Sometimes you need to disprove conventional knowledge to find it.

There is a way that 99% of the industry prefers to sell fixed indexed annuities.  That works for some people but most often it is not the “best” way to solve your problems.

A better way…

When you run the numbers, many annuity strategies decrease your net worth over your retirement years.  For many people it’s a necessary evil because it’s too risky to go without guaranteed income.  What if you can have the protection you want but get it in a way that allows you to increase your net worth through retirement?

For those of you who have saved enough to retire comfortably you will notice this is based on a few basic asset management principles.  You can eliminate the two biggest complaints about annuities and receive more benefit than you will get from any other strategy.  I don’t care who you saw on TV that says otherwise!

This is the beginning of a safe and flexible strategy that allows you minimize the cost for protection and in turn maximize the output from your portfolio.  You can check it out now using the link below.

Click here to learn more about this smart, flexible annuity strategy.  

Or, continue reading if you’d like to start with the basics and learn what you can expect from fixed indexed annuities.  You owe it to yourself to make an informed decision.  Whether you use an annuity or not is a decision that needs to be made based on facts.  

PROS AND CONS OF FIXED INDEXED ANNUITIES:

Each of the individual components of a fixed indexed annuity can be seen as a pro or a con, depending on your expectations and goals.  Let’s look at each of the major components and the positive vs. negative attributes of each.

Safety:

Pro- You will never lose money.  The insurance company invests your premium in a portfolio of safe investments and backs it up even further with substantial company reserves giving your money the protection and guarantee that you need.

Con- This isn’t good enough for some people.  The cost for safety is limited growth and there are those that don’t mind risk in return for unlimited growth potential.

Earnings Guaranteed:

Pro- Once interest is credited to your account it is also guaranteed against loss.  Protected principal and earnings is a powerful benefit that pays off when markets are volatile.

Con- Most interest is credited once per year, although there are options for two and three year crediting as well.  This means your earnings potential depends on how the market finishes on a single day.  A significant drop in the market at the end of your crediting period can wipe out expected gains.  That can be positive as well but it’s important to not place all your expectations on a single year.

Caps, Participation Rates and Spreads: 

Pro- You get a risk-free option to track performance of a stock market index.  Option costs dictate how much of that gain you receive.  Specifics go deeper but the benefit is that you will experience yields that are far greater than any safe asset.

Con- Again, it all speaks to expectations.  If you think you can buy your own options and do better then go for it.

Surrender Periods: 

Pro- This is all relative to other safe money options.  CDs and Bonds have some long commitments as well but the annuity comes with access to funds and protection from interest rate risk.

Con- Many supposed experts tell you not to lock money up for extended periods of time.  It all depends on your plans for the money so if the annual free withdrawal is not enough to meet your needs then an annuity is not right for you.

Indices and  Crediting Methods:

Pro- Considering the entire annuity market, you have an overabundance of indices to choose from and crediting methods to use so no matter what your preference, there is an option available that will work for you.

Con- This can be seen as fairly complicated given all available options and strategies.  If you start by looking at this then you may as well just give up.  Start with how the annuity will help you reach a goal and decide on this last.

Now- The Basics of How Indexed Annuities Work

The Pros and Cons of Fixed Index Annuities

The AST Flex Strategy helps you understand the pros and cons of fixed index annuities.

Index Annuities, Fixed Indexed Annuities, and Equity Indexed Annuities, all mean the same thing. These are all the same insurance product with different labels, but the correct name is a ‘Fixed Indexed Annuity’.

Fixed Indexed Annuities are nothing more than fixed annuities with a different method of crediting interest. With a fixed annuity, which is a lot like a CD, the contract owner receives a stated rate of interest each year.

But with an Index Annuity, the appreciation rate is calculated based on growth in an outside market index, like the S+P 500 or the Dow Jones index.

The beauty of Index Annuities is that if the market index goes up, the contract makes money. But if the index goes down, the principal is protected and the contract does not lose value.

Index annuities give consumers a partial participation in the markets, but offer a principal guarantee.

How Insurance Companies Make This Possible

How can insurance companies make a guarantee that your Fixed Index Annuity may go up, but will not go down?

Insurance companies in general use the premium they bring in to invest in safe assets in the general account.  Think of it like a large pool of conservatively invested money.

In a Fixed Indexed Annuity, the insurance company uses your premium to invest in bonds, mortgages, and other instruments in the safe, core general account.  This produces an annual rate of return, often known as the ‘general account’ yield.  The insurance company expenses are subtracted from this to create the yield you can expect to see with a fixed annuity.

But with an indexed annuity, instead of accepting this ‘general account’ fixed rate, the insurance company uses the interest earned from the conservative portfolio to purchase an option position in a market index.

If the market goes up, the company will exercise the option and realize a gain that is credited to your annuity account value.

If the market moves sideways or down, the option expires worthless and no interest – or gain- is available for crediting, but most importantly no loss of principal is realized.

Potential for Gain with No Risk of Loss

When talking about the pros and cons of fixed indexed annuities, the biggest positive is that index annuities truly offer you the potential for gains based on market appreciation, without the risk of loss to your principal.

Your principal is not at risk, rather, it’s only the earnings from your principal are invested in potentially higher yield options. Thus, an indexed annuity is a safe asset with upside potential.

This explanation also gives you a good idea why these are called “Fixed Indexed Annuities”. Income from the FIXED account growth is used to buy options in a market INDEX for potential gain.

 Using Fixed Index Annuities

Fixed indexed annuities are a great alternative to bonds and are a core, safe money holding often used to make sure principal is safe, and to preserve assets and options for later.

But far too often, the fixed indexed annuity is sold with income or long-term care benefits that add more cost and take away from the real benefits you need.

Additional cost is fine for additional benefit but you need to look at it from a different angle to see if if it truly gives you more money.  Most times it does not.  The key to getting the most out of an annuity is to use it so that the annuity allows you to get the most out of your total portfolio.  There is a best way to do it and that’s the only way I suggest doing it.

Like I said at the beginning, most annuities are sold in a way that decreases net worth in the long run.  But there’s a way to use an annuity that increases your net worth throughout retirement.  Are you interested in finding it?

A great start is The Annuity Guide which is essential reading for retirees considering Fixed Indexed Annuities.  It is available for a free download at Annuity Straight Talk, and will help you find the safety and guarantees you need.

Click Here to get your copy today!

If you seek a qualified adviser well versed in the pros and cons of fixed index annuities, please do not hesitate to contact Annuity Straight Talk today on 800-438-5121.

Understand the Pros and Cons of Fixed Indexed Annuities

pros and cons of fixed index annuities

The pros and cons of any product are directly related to how you use that product.  With fixed indexed annuities it all depends on your goals and whether this type of annuity can help you meet those goals.

And when it comes to solving retirement problems, in every case there exists a “best” way to get things done.  Sometimes you need to disprove conventional knowledge to find it.

There is a way that 99% of the industry prefers to sell fixed indexed annuities.  That works for some people but most often it is not the “best” way to solve your problems.

A Better Way…

When you run the numbers, many annuity strategies decrease your net worth over your retirement years.  For many people it’s a necessary evil because it’s too risky to go without guaranteed income.  What if you can have the protection you want but get it in a way that allows you to increase your net worth through retirement?

For those of you who have saved enough to retire comfortably you will notice this is based on a few basic asset management principles.  You can eliminate the two biggest complaints about annuities and receive more benefit than you will get from any other strategy.  I don’t care who you saw on TV that says otherwise!

This is the beginning of a safe and flexible strategy that allows you minimize the cost for protection and in turn maximize the output from your portfolio.  You can check it out now using the link below.

Click here to learn more about this smart, flexible annuity strategy.  If you’d prefer, you may always call 800.438.5121 to talk about your situation, or continue reading if you’d like to start with the basics and learn what you can expect from fixed indexed annuities.  You owe it to yourself to make an informed decision.  Whether you use an annuity or not is a decision that needs to be made based on facts.

PROS AND CONS OF FIXED INDEXED ANNUITIES:

Each of the individual components of a fixed indexed annuity can be seen as a pro or a con, depending on your expectations and goals.  Let’s look at each of the major components and the positive vs. negative attributes of each.

Safety:

Pro- You will never lose money.  The insurance company invests your premium in a portfolio of safe investments and backs it up even further with substantial company reserves giving your money the protection and guarantee that you need.

Con- This isn’t good enough for some people.  The cost for safety is limited growth and there are those that don’t mind risk in return for unlimited growth potential.

Earnings Guaranteed:

Pro- Once interest is credited to your account it is also guaranteed against loss.  Protected principal and earnings is a powerful benefit that pays off when markets are volatile.

Con- Most interest is credited once per year, although there are options for two and three year crediting as well.  This means your earnings potential depends on how the market finishes on a single day.  A significant drop in the market at the end of your crediting period can wipe out expected gains.  That can be positive as well but it’s important to not place all your expectations on a single year.

Caps, Participation Rates and Spreads: 

Pro- You get a risk-free option to track performance of a stock market index.  Option costs dictate how much of that gain you receive.  Specifics go deeper but the benefit is that you will experience yields that are far greater than any safe asset.

Con- Again, it all speaks to expectations.  If you think you can buy your own options and do better then go for it.

Surrender Periods: 

Pro- This is all relative to other safe money options.  CDs and Bonds have some long commitments as well but the annuity comes with access to funds and protection from interest rate risk.

Con- Many supposed experts tell you not to lock money up for extended periods of time.  It all depends on your plans for the money so if the annual free withdrawal is not enough to meet your needs then an annuity is not right for you.

Indices and  Crediting Methods:

Pro- Considering the entire annuity market, you have an overabundance of indices to choose from and crediting methods to use so no matter what your preference, there is an option available that will work for you.

Now- The Basics of How Index Annuities Work

The Pros and Cons of Fixed Index Annuities

The AST Flex Strategy helps you understand the pros and cons of fixed index annuities.

Index Annuities, Fixed Index Annuities, and Equity Indexed Annuities, all mean the same thing. These are all the same insurance product with different labels, but the correct name is a ‘Fixed Indexed Annuity’.

Fixed Index Annuities are nothing more than fixed annuities with a different method of crediting interest. With a fixed annuity, which is a lot like a CD, the contract owner receives a stated rate of interest each year.

But with an Index Annuity, the appreciation rate is calculated based on growth in an outside market index, like the S+P 500 or the Dow Jones index.

The beauty of Index Annuities is that if the market index goes up, the contract makes money. But if the index goes down, the principal is protected and the contract does not lose value.

Index annuities give consumers a partial participation in the markets, but offer a principal guarantee.

How Insurance Companies Make This Possible

How can insurance companies make a guarantee that your Fixed Index Annuity may go up, but will not go down?

Insurance companies in general use the premium they bring in to invest in safe assets in the general account.  Think of it like a large pool of conservatively invested money.

In a Fixed Indexed Annuity, the insurance company uses your premium to invest in bonds, mortgages, and other instruments in the safe, core general account.  This produces an annual rate of return, often known as the ‘general account’ yield.  The insurance company expenses are subtracted from this to create the yield you can expect to see with a fixed annuity.

But with an indexed annuity, instead of accepting this ‘general account’ fixed rate, the insurance company uses the interest earned from the conservative portfolio to purchase an option position in a market index.

If the market goes up, the company will exercise the option and realize a gain that is credited to your annuity account value.

If the market moves sideways or down, the option expires worthless and no interest – or gain- is available for crediting, but most importantly no loss of principal is realized.

Potential for Gain with No Risk of Loss

When talking about the pros and cons of fixed indexed annuities, the biggest positive is that index annuities truly offer you the potential for gains based on market appreciation, without the risk of loss to your principal.

Your principal is not at risk, rather, it’s only the earnings from your principal are invested in potentially higher yield options. Thus, an indexed annuity is a safe asset with upside potential.

This explanation also gives you a good idea why these are called “Fixed Indexed Annuities”. Income from the FIXED account growth is used to buy options in a market INDEX for potential gain.

 Using Fixed Index Annuities

Fixed index annuities are a great alternative to bonds and are a core, safe money holding often used to make sure principal is safe, and to preserve assets and options for later.

But far too often, the fixed indexed annuity is sold with income or long-term care benefits that add more cost and take away from the real benefits you need.

Additional cost is fine for additional benefit but you need to look at it from a different angle to see if if it truly gives you more money.  Most times it does not.  The key to getting the most out of an annuity is to use it so that the annuity allows you to get the most out of your total portfolio.  There is a best way to do it and that’s the only way I suggest doing it.

Like I said at the beginning, most annuities are sold in a way that decreases net worth in the long run.  But there’s a way to use an annuity that increases your net worth throughout retirement.  Are you interested in finding it?

We’ve produced The Annuity Guide as essential reading for retirees considering Fixed Index Annuities.  It is available for a free download at Annuity Straight Talk, and will help you find the safety and guarantees you need.

Click Here to get your copy today!

If you seek a qualified adviser well versed in the pros and cons of fixed index annuities, please do not hesitate to contact Annuity Straight Talk today on 800-438-5121.

The Validity of Fixed Index Annuities

Since I always direct people to search for facts that support financial products and strategies, I recommend all members of Annuity Straight Talk take a look at this report published by the Wharton Financial Institutions center regarding fixed index annuities.

Fixed Index annuities have a place at the table in retirement income planning.  In the report found here, the authors offer evidence that shows fixed index annuities produce favorable returns in comparison to all other asset classes over the past decade or more.

These products are relatively new to the retirement market so it is useful to have some objective information to help decide whether it’s the right fit for you.

The real advantage to fixed index annuities is the fact that the account values don’t decline when the market drops.  And although positive returns are subject to maximum cap rates, the lower volatility makes the overall gains very competitive.

In addition, because of the more stable asset base, future income guarantees far outpace comparable variable annuities.

When you read this report, start with the abstract points listed at the beginning to get the basic conclusions of the report.  If you’ve ever questioned the validity of fixed index annuities, I suggest skimming the report for verification of the quality of this product type.

For a discussion about how fixed index annuities can help stabilize your retirement assets please learn more about this in the The Annuity Report by signing up below or to the right.  Or, explore these  pages on Fixed Index Annuities or these pages on their popular income- rider siblings, Hybrid Annuities.

Bryan J. Anderson

800.438.5121 [email protected]

Refer here for more on fixed index annuities

How Has The Stock Market Treated You?

I recently came across this article in the September edition of The Atlantic titled The Great Stock Myth that should give everyone something to think about.

We are all taught to believe the the stock market should offer a premium return in exchange for the associated level of risk. That has mostly been true for much of the past century. Recent history, however, shows that the premium steadily decreased as more and more people poured money into the equity markets.

This article mentions a couple of studies, one completed in 1999 that show investors expected annual returns of 30%. Another notes that even after the 2008 crash, one in four investors expects annual returns of 10-20%.

Where do such high expectation originate? Actual performance results over the past decade have been slim to negative in most cases. Forecasts for the next ten years don’t offer much hope, either.

What are your expectations for retirement asset growth? Can you afford to shoulder the risk of the markets without any reward?

It seems a wise move to not rely solely on equities for placement of sacred retirement assets when volatility is least wanted.

One of the fundamental purposes of Annuity Straight Talk is to offer honest information to people who are tired of getting battered and bruised in the stock market. You can safely and predictably grow your assets while assuming little to no risk. It is likely an annuity of one form or another is exactly what you need.

Curious? Just ask me how. Sign up now to receive the free reports on this site or feel free to call or email any time. I can be reached at 800.438.5121 or [email protected]

To read The Atlantic Monthly aricle click here.

Are Fixed Index Annuities a Good Option For Retirement Savings?

In today’s tough economic climate,  fixed index annuities may provide you with the security and confidence you are seeking for your retirement savings.

The ‘Fixed Index Annuity’ is also known sometimes as an ‘Equity Index Annuity’. Fixed indexed annuities came onto the market in 1995 and have been steadily gaining popularity. Insurance companies are writing these annuities with a minimum guaranteed return and tying the annuities into another stock market index, such as the S&P 500 or Dow Jones Industrial Average.

You can determine if a fixed index annuity it right for you by looking at your investment goals and time frame. Short term investors seeking maximum returns should shop elsewhere. These annuities are vehicles for long term investors seeking stable returns, not double digit yields. Also, if you like to constantly rebalance your holdings, you should probably not invest in an index annuity. The ideal candidate for an equity indexed annuity would be a long-term, conservative investor who is seeking a stable and steady return. Someone who wants to no risk to their principal but would like to realize higher returns than a CD or money market account, which are also tax-deferred. An equity indexed annuity is a valuable addition to reaching your retirement goals.

Some Contract Features of Fixed Index Annuities:

  • Guaranteed Minimum Rates of Return: Fixed Indexed annuities guarantee a minimum rate of return no matter how the market performs. This return is usually 3% and is credited to a portion of the account value during the contract term.
  • The Stock Index: Fixed Indexed Annuities interest calculations are tied in the performance of a stock price index, such as the S&P 500, without taking into account dividends and capital gains.
  • Participation Rate: The participation rate is set in the contract terms and determines how much the contract owner shares in the index increase. They participation rate percentage is multiplied by the index change percentage to determine what interest rate the contract owner will be credited. If the participation rate is 70%, the contract owner will enjoy 70% of the index change.
  • Caps: A cap is the opposite of the guaranteed minimum rate of return. In essence, an annuity cannot earn more interest than the cap states in a particular period.

One should also note that equity indexed annuities have early withdrawal penalties, or surrender fees. The surrender fees may decrease over the years, but check contract clauses for details on these fees as they can be quite expensive. Remember, these annuities are best for investing long-term, so it is best to only invest money you will not need for several years.

When selecting equity indexed annuities there are is array of components to take into account. Every company offers different products and every annuity has different contract terms. Terms that vary include participation rate, cap, surrender fees, annual reset, etc.

While you may have heard some negative comments about equity indexed annuities (AKA fixed index annuities), this is largely in part to unscrupulous or un-knowledgeable sales agents selling these products to consumers who do not know what they are buying into. Do your research, find a reputable agent with experience in the equity index annuity field and know what product best suits you and your retirement needs.

Find more about Fixed Index annuities in The Annuity Report .

Learn more about this on the The Annuity Report by signing up below or to the right.  Or, explore these  pages on Fixed Index Annuities or these pages on their popular income- rider siblings, Hybrid Annuities.

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Fixed Index Annuity Rates

There are many components to fixed index annuity rates, and they have plenty of working parts that make the contracts seem complicated when they don’t need to be. Among the perceived complexities are the various rates that contribute to overall contract performance. A true professional takes a surgical approach to the analysis so let’s go piece by piece and when finished I think you’ll agree; fixed index annuities aren’t that complicated.

The Various Fixed Index Annuity Rates:

Declared Fixed Rate- Most index annuities offer the option for a simple fixed rate that is exactly like the rate offered in a plain old fixed annuity. Each contract will note the current declared rate, contractual minimum renewal rate or specify that the rate is guaranteed for the entire time period.

Participation Rate- This tells you the percentage of the associated market index that will be credited to the account when asset values are locked in.

Cap Rate- This indicates the maximum amount of interest that will be credited to the account when asset values are locked in.

** Pertaining to Cap and Participation rates, asset values typically lock-in annually but can do so in several other annual time periods as specified in the contract. This is called a contractual reset which can range from one to ten years.

Guaranteed Income Growth Rate- One of the more popular additions to fixed index annuities in recent years is the opportunity for guaranteed lifetime income regardless of account performance. With this option, the account value will grow only when the market does while the income benefit is guaranteed to increase at all times. This affords the contract owner of some level of certainty as to what level of retirement income to expect.

Death Benefit- Many fixed index annuity contracts offer an optional death benefit. With this the contract owner is guaranteed the greater of the account value or a guaranteed annual percentage increase at death.

Payout Rate- When the option for guaranteed lifetime income is elected, payments will be calculated based on the age of the contract owner and joint annuitant if applicable. Different payout rates will be available based on these factors an expressed as a percentage of the guaranteed income benefit or account value, whichever is greater.

Fixed Index Annuity Rates Summary:

This basically sums up the various rates that indicate the potential performance of a fixed index annuity. As there are several moving parts to this type of annuity product, all of the points above relate directly to certain contract provisions that require further explanation for proper knowledge before purchase.  Feel free to Contact Us  for help in selecting the right annuity for your unique situation.

Refer to additional information on this site for more detail on the inner-workings of fixed index annuity contracts. If you are considering the use of a fixed index annuity for retirement income planning be sure to seek the advice of an unbiased professional. The Annuity Report is a great place to start… sign up below for more info on annuities.

Annuity Rates

It seems as though there would be a simple explanation for such a plain term as ‘annuity rates’. You’ll find, however, that depending on the type of product you are considering, several different rates may apply.

There are many annuity rates to consider that all contribute to the performance of a contract. It’s important to know what to expect with a major financial commitment so an analysis of each of these rates is needed to determine what is appropriate to your situation.

This section will give you a great idea of what to look for when comparing annuity rates among different contracts. Each type of annuity contract is listed below with a list of rates appropriate for each. Follow the link to the product of your choice for a more in-depth explanation of what those rates mean.

Fixed Annuity Rates

Fixed Annuities are among the simpler contracts to understand, but still, there are a variety of rates to consider.  We have a full page on Fixed Annuities and explanations, where you will encounter:

  • Multi-Year Guarantee Rate
  • Current Rate
  • Renewal Rate
  • Guaranteed Minimum Rate
  • Bailout Rate
  • Bonus Rate
  • Yield To Maturity

Immediate Annuity Rates

Immediate Annuities have the fewest moving parts of any annuity- it’s primarily a payout rate, determined by you age, and the current marketplace.  Click to learn more detail about Immediate Annuities and understand the following terms:

  • Discount Rate
  • Mortality Credit
  • Payout Rate

Fixed Index Annuity Rates

Fixed Index Annuities have considerably more moving parts, and unfortunately, the actuarial complexity turns many potential investors away from these fundamentally sound and safe contracts.  Please explore our in depth analysis of fixed index annuities, and do not hesitate to Contact Us if you want a thorough analysis and the right annuity for your needs.

  • Declared Fixed Rate
  • Participation Rate
  • Cap Rate
  • Guaranteed Income Growth Rate
  • Payout Rate
  • Death Benefit Rate

Variable Annuity Rates

Variable annuities by their nature are, well, variable, based on the underlying investments that you select.  However you will likely see a few terms when investigating variable annuities:

  • Fixed Rate
  • Death Benefit
  • Guaranteed Income Growth Rate
  • Payout Rate

Secondary Market Annuity Rates

Secondary Market annuities offer higher rates of appreciation and return than most other annuities, for the simple reason that they are sold at a discount from face value.  With these annuities you will see various definitions, such as:

  • Immediate Income
  • Discount Rate
  • Deferred Income
  • Growth Rate
  • Discount Rate
  • Future Lump Sum Rates
  • Growth Rate

Summary:

There are a lot of different rates to understand. It’s definitely not something that can be explained in a sound bite. If you haven’t gone through the individual product pages to learn how each type of contract works, this might be a good time to do it. Also, feel free to take a look at the pros and cons of each type of annuity to see which one most appeals to you.

If you have already done all that and have a firm grasp on what each type of annuity contract is intended to do, then by all means visit the page that most interests you. Follow the links above to a separate page for each. If something just doesn’t seem to come together for you, please contact an expert now to get answers to all your questions.