With the market continuing its roller coaster ride in 2016, more consumers are continuing to search for financial vehicles that will help them with the growth that they need for beating inflation, while at the same time protecting their hard-earned principal from market downturns.
One option that seems to fit the bill for many people is the fixed indexed annuity, as it provides market index-linked growth along with protection of principal. So, why is it that so many consumers still don't know about these products?
Here are just some of the highlights about FIAs that people need to be aware of. (For more, see: How Annuities Can Boost Your Retirement Confidence.)
Opportunity for Growth
Fixed indexed annuities provide the opportunity for more growth than a regular fixed annuity. This is because while a fixed indexed annuity will offer a guaranteed return, it will also provide the ability to increase return through its link to an underlying market index such as the S&P 500.
As with other types of annuities, the funds that are within the FIA account are allowed to grow on a tax-deferred basis. This means that there is no tax due on the gains in the account until the time of withdrawal. Because this withdrawal typically does not occur until retirement, it is likely that the annuity holder will be in a lower income tax bracket — allowing him or her to be taxed at a lower rate at that time.
In addition, unlike other types of investments such as stocks or mutual funds, the FIA holder's gains are locked in each year, never to be lost, even if the underlying index is to have future negative periods down the road. (For related reading, see: When to Update Your Life Insurance Beneficiaries.)
Protection of Principal
If there does happen to be a negative period in the underlying market index, the FIA holder's account is simply credited with a 0% rather than with a loss, protecting the annuity holder's principal from market downturns. This will, in turn, alleviate the need to build assets back up from losses in order to get to a break-even point.
Obtaining Guaranteed Lifetime Income
When the time comes to transition the accumulated funds from the FIA into income, FIA holders have the option to receive an income stream for the remainder of their life — regardless of how long that may be — by choosing the lifetime income option. They can also choose to add a spouse, a partner, or other individual to also receive a guaranteed lifetime income stream by choosing the joint life income option feature on the FIA. (For related reading, see: The Advantages of Indexed Universal Life Insurance.)
The Lure of Customization
Another key advantage of fixed indexed annuities is that this flexible financial vehicle can also be further customized in order to meet specific needs of their holders. For example, there are various additional riders that can be added to an FIA that can allow individuals to access funds for certain reasons, such as disability and long-term care.
Not All Are the Same
While a fixed indexed annuity can be an integral piece of many retirees and pre-retirees' portfolios, it is important to know that not all FIAs are identical in nature. With that in mind, it is essential to have a good understanding of your specific needs and goals, and then to match those with the FIA that can best help you in meeting them.
Working with an independent insurance agency that has access to multiple annuity carriers is typically the best way to go about this, as it can offer you the choices that you need to make unbiased comparisons. An independent agency can also provide you with additional planning advice, and can work with you in narrowing down which fixed indexed annuity could be the best one for you. (For related reading, see: Why Rollover Your Retirement Assets Into an IRA?)
Brad Cummins is founder of LocalLifeAgents, a Columbus, Ohio-based firm of independent insurance agents.