Fixed Indexed Annuities and how they work?
Fixed indexed annuities (FIAs) are one of the hottest investments around. These are basically a tax-favoured accumulation product, issued by an insurance company. According to Allianz Life of North America, it is a contract between a person and an insurance company that may help in reaching the financial goals of that person. In these, accumulation refers to the growth in the index rates over the initial investments, which can be either starting immediately or at some time in the future.
How do Fixed Index Annuities work?
Basically, annuities are a retirement product that can be important in your overall retirement portfolio. The primary function of an annuity is to protect against longevity risk or the possibility of running out of money late in life. Fixed indexed annuities provide the guarantees of fixed annuities, combined with the opportunity to earn interest based on changes in an external market index, without being affected by market risks as you are not actually participating in the market.
- Purchasing annuity: The first stage is to purchase the annuity by giving money payments to the insurance company. The insurance company then invests it on behalf of all annuity owners to support the benefits of the contract.
- Accumulation: During the accumulation phase, your annuity will earn a fixed rate of interest that is guaranteed by the insurance company or an interest rate based on the growth of an external index.
- Tax-deferred growth: With a fixed interest annuity, you defer paying taxes on your contract's interest until you receive money from the contract. Tax-deferred interest means the money in your contract can grow faster, because it is compounding in growth each year.
- Distribution phase: After a period of time specified by your contract, you may then receive the amount allowed by your contract in a lump sum, over a set period of time, or as income for the rest of your life.
You will be guaranteed the return of the money you originally paid into your fixed indexed annuity, unless you surrender some, or all of your annuities during the surrender charge period.
Benefits of Fixed Indexed Annuities
As you plan for retirement, you want to give yourself every possible advantage, either you are accumulating your savings or after you begin receiving income. FIAs can offer you the following benefits,
- Increased protection with income: Your income payments will be scheduled as withdrawals you can begin any time after you reach a certain age (often age 60). And with some FIAs, your income payments will be larger if you postpone taking them for a few years.
- Protection of Principal from risks: Your principal and earnings are protected in the credit markets, no matter what direction interest rates may take as the account value of FIAs is guaranteed.
- Guarantees and Optional protection benefits: Fixed index annuities offers a range of guarantees and optional protection benefits available. These guarantees help protect your assets, your retirement income, and your beneficiaries. In exchange for the risk transfer, the benefits may carry an additional cost that will vary by product and company.
- Guaranteed Income: A fixed index annuity puts you in control of your future income and that is based on the annuity you choose and how much money you put into it.
- Retire with Lifetime Income: Many FIAs offer optional income riders which provide withdrawal benefits similar to immediate annuities. This type of annuity provides you with a monthly check, guaranteed to remain constant over the duration of your lifetime.
Another advantage of a fixed index annuity is that the earnings grow on a tax-deferred basis. This means you pay no income taxes until you withdraw money from the annuity. This is especially important when you buy your index annuity with personal savings.
Is a fixed index annuity right for you?
For those who do not have access to a traditional or defined benefit pension, fixed indexed annuities can be the perfect replacement. But the conditions vary from person to person. Only you can determine your needs and requirements. However, you can always take help from your financial professionals, who can help you find the right solution because purchasing an annuity is an important decision.
