But when it comes to guaranteed income, all too often, retirees are only shown just a few options, like complicated ‘hybrid’ lifetime income annuities.
It’s a shame, but people mistakenly think they must settle for these low income payout, long term contracts that offer little or no growth of their money. When it comes to pros and cons, too often, the ‘cons’ outweigh the ‘pros’ with these types of contracts.
You CAN Do Better!
Don’t let a few bad apples spoil the barrel- the reality is, there ARE better options out there that can secure your money and create a guaranteed income without locking yourself in to a ‘forever contract’ that you may come to regret.
In fact, savvy customers often find the guaranteed safety they need, but do so by staying OUT of guaranteed income contracts entirely!
With a focus on a safe and flexible guaranteed outcome planning, these smart consumers around the country have discovered the “Flex Strategy” and are using Fixed Index Annuities that guarantee the retirement they dream of, to mitigate risk and produce income options years into the future.
Click here to learn more about this smart, flexible annuity strategy. Or, read on for more on how a solid understanding of the pros and cons of Fixed Index Annuities, where we reveal how you can take the best these exciting products have to offer, and ditch the bloated bells and whistles, to create a compelling and flexible guaranteed retirement strategy.
PROS AND CONS OF FIXED INDEX ANNUITIES: Pros
Principle and Growth Guarantee- Your initial investment is safe from loss, and guaranteed to grow. The contract will state the minimum amount you can expect to receive at the end of the surrender period.
Tax Deferral- Like all annuities, your money grows on a tax-deferred basis.
Account Step Ups- In most cases, a new base contract value can be locked in when the index performs well. This gives you the benefit of locking in a new guaranteed basis when the market works the way we all want it to.
Low Cap and Participation Rates- Unfortunately, there are poorly constructed index annuities that will not have beneficial caps and participation rates. It’s critical to know what the objective of your investment is to ensure you get the right type of contract for your needs. Growth oriented fixed index annuities have the better cap and participation rates than income oriented ‘hybrid’ annuities.
Long Surrender Periods- Again, poorly constructed contracts have long surrender periods, like 10 to 15 years. Let me state for the record that I have yet to see a good indexed annuity with a long surrender period. A more appropriate time horizon is five to 7 years. For instance, one of my favorite products in this category has a seven-year surrender period and generous provisions to allow you to take money out during that term. If you happen to really like it after seven years, then buy it again and make it a fourteen-year strategy…. but at the very least, give yourself options so that if it doesn’t work for you, your money is free a lot sooner.
Complex Crediting Methods- Using obscure or proprietary indexes or complex crediting methods just makes it hard to understand the annuity. Try to keep it simple so you can monitor performance and understand what happens on the account.
Now- The Basics of How Index Annuities Work
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 Index 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 fact ,Warren Buffet made his money buying insurance companies, and then using the premiums to buy other businesses that increased the overall corporate financial strength.
In a Fixed Index 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. you will see this rate credited in fixed annuities, and also in many cash value life insurance products.
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. An option is simply the right- but not the obligation- to purchase securities at a future date for a contractually stated price.
If the market goes up, the company will exercise the option and realize a gain. They credit a portion of the gain on that option contract to your annuity contract.
If the market moves sideways or down, the option expires worthless and no interest – or gain- is available for crediting.
Potential for Gain with No Risk of Loss
When talking about the pros and cons of fixed index 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 Index Annuities”. Income from the FIXED account growth is used to buy options in a market INDEX for potential gain.
If the market rises, you may profit. If the market falls, the company has wagered only your income from the FIXED account, so your principal at all times remains safe.
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.
The typical buyer of an index annuity seeks the potential for growth without risk of loss, and appreciates principal protection and tax deferred compounding.
But far too often, the simple and elegant fixed index annuity gets clouded with bells and whistles and add-on riders, turning it into more of a ‘hybrid annuity’.
It’s crucial to know that most ‘hybrid annuities’ are not optimized for safety and growth.
In fact, there are over 350 different index annuity contracts on the market today and it’s growing every day.
Far too many agents have one preferred contract they work with for all scenarios. That is just not appropriate, and it’s why we start by understanding your objectives first before looking at any specific contract.
For more than 13 years we have watched, analyzed, and sold these annuities and have come to understand them intimately. Better than anyone, we understand the pros and cons of fixed index annuities and how to use them in retirement.
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.
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.