What Are the Advantages of Fixed-Indexed Annuities?
Fixed-Indexed annuities describe financial contracts between an annuitant (you) and an insurance company. These particular types of annuities have certain characteristics that we will describe in this article. As with other financial products, fixed-indexed annuities have advantages and disadvantages. Thus, you can choose to purchase them depending on your financial situation.
What Do They Provide?
Fixed-indexed annuities offer minimum guaranteed interest rates and tie the interest rate to broad stock market indexes, such as the S&P 500 and the Dow Jones Industrial Average. The unique hybrid design offers a nice balance between risk and reward for those looking to build their nest egg.
History
Fixed-Indexed annuities were created during the stock boom of the mid-1990s to compete with bank certificates of deposit.
How Do They Work?
When you buy a fixed-indexed annuity contract, the insurance company you purchase from invests your money into a market index of your choice. You can select an index for your funds or spread your funds across several indexes.
What you gain in protection from losses, you lose in the cap fixed-indexed annuities feature. These types of annuities limit how much you earn even in strong markets. Thus, they are less risky but also feature less reward than other annuities, such as variable annuities.
Guaranteed Minimum Return
Indexed annuities have what’s known as a guaranteed minimum return. If you buy an indexed annuity, you can guarantee you receive at least a certain amount. For example, if the stock market drops in value next year and you have a guaranteed minimum rate on a fixed-indexed annuity, you will still earn that rate.
However, if the stock market performs exceptionally well, you will have a cap to the percentage you can earn. For example, if the index where your annuity is earns 9% in one year, but you have a cap at 7%, you will not earn the remaining two percent.
Who Should Get One?
Indexed annuities suit those who can afford to wait to receive the returns from their investment. They are most beneficial for investors when they purchase them 10-15 years before they need the money. This is due to the time period when investors can weather any downturns that occur that might diminish the annuity’s worth.
Most people prefer fixed-indexed annuities due to their downside protection and the potential to guard themselves completely from losing money while investing. Though you trade upside potential for the downside protection. You can also customize fixed-indexed annuities to fit the annuity owner’s financial circumstances.
Lastly, fixed-indexed annuities let you tailor the risk profile based on your goals and risk tolerance levels. You can choose your fixed-indexed annuity based on your investing goals, time horizon, and overall investment philosophy.
What Are the Advantages of Fixed-Indexed Annuities?
The primary advantage of a fixed-indexed annuity is that it can guarantee you don’t lose money. The drawback is that these types of annuities don’t typically carry that high of returns. Overall, if you don’t need money right away in retirement and you want to accrue interest without too high of a downside risk, fixed-indexed annuities are an option worth considering.
