An insurance product with an investment element
Fixed Indexed Annuities (FIAs) continue to grow in popularity. FIA sales in the U.S. were a record $53 billion in 2015, an increase of 13 percent over 2014, according to Wink’s Sales & Market Report. FIAs have also attracted the attention of brokers who previously sold only stocks, bonds and funds.
- Transform savings into income. When you purchase an annuity, you are exchanging a lump sum of money for an agreed upon income stream. Fixed annuities are appealing to retirees because they transform savings into a predictable income.
- Growth potential. While FIAs don’t directly invest in the stock market, they offer potential account growth based on the performance of a specified index, such as the S&P 500®. If the index has a positive return, the FIA policy is credited with interest.
- Principal-protected safety. In 2008, many people lost a significant portion of their retirement savings as a result of stock market volatility. Those with fixed indexed annuities experienced no losses due to market downturns. FIAs are backed by the strength of the insurance company that offers it. Some of these insurance companies have been in business more than 150 years.
- Downside market protection. Because FIAs don’t directly participate in any stock or equity investment, they will not lose value if there is a negative market return.
- Income guarantee. Annuities are designed to pay you a monthly income either immediately or in the future (called a deferred annuity). There are also policy riders that offer lifetime income, as well as the option of adding your spouse. Since the average 65-year-old couple today has a 52% chance of having at least one spouse live to 95, based on the Annuity 2012 Generational Mortality Table, FIAs with guaranteed lifetime income riders are attractive to retirees who do not want to outlive their savings.
- Tax-deferred growth. FIAs offer 100% tax-deferred growth. You’re not taxed on interest earnings while your money stays in the annuity. Once you start receiving payouts, just like a 401(k) or traditional IRA, they are taxed as ordinary income based on your income tax rate at the time. Similarly, if payments begin before age 59-1/2, an additional 10% federal tax may apply. You can also hold FIAs in non-qualified accounts with similar tax benefits, and with no penalties or mandatory distributions based on age.
- Bond replacement. Many investment advisors believe FIAs closely approximate bonds and other fixed-rate products, such as savings accounts or CDs. Historically-low interest rates being paid on those accounts have contributed to FIAs becoming a popular alternative, especially with their potential for greater growth and compound interest based on market performance, avoiding actual exposure to market risk.
- More options. Annuity policies continue to grow and evolve. There are FIAs that offer inflation protection or coverage for long-term care. Each policy is different, and insurance companies offer varying coverage as they compete and improve their policies and riders based on consumer demand.
- Predictable income makes retirees happier. According to a Towers Watson Retirement Survey, having predicable retirement income makes retirees happier than withdrawing money from investments like 401(k)s or IRAs to pay for retirement expenses, which can cause anxiety.
If you die early, you will lose your policy.
FIAs are insurance products that have changed and evolved, and many now allow spousal survivorship, as well as allowing you to name a beneficiary to receive a death benefit…without going probate.
You’ll lose access to your cash with no real guarantee you’ll see the benefit.
Most financial advisors offer FIAs as part of a complete, balanced portfolio. With dramatic longevity increases in the last decades, the lifetime income rider is an important option to consider. Some policies waive surrender charges for disability, unemployment or terminal illness.
There are high commissions and fees.
Sales commissions on FIAs are paid by the insurance company offering the policy. Michael Kitces of Washington D.C., an industry expert who has analyzed the costs says, “Ultimately, the reality is that the expense of fixed and indexed annuities is actually remarkably similar to most other types of annuity and investment products.” While no investment is 100% guaranteed, many advisors say the historic performance of FIAs is positive and the principal protection backed by insurance companies brings peace of mind.