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What are Fixed-Indexed Annuities?

fixed-indexed annuities
Insurance Quotes 2 Day Team

Written By Doug Mitchell

Doug Mitchell, CLU holds a BA degree in Finance from Auburn University as well as having obtained a Chartered Life Underwriter (CLU) designation from The American College in Bryn Mahr, PA.  Doug has spent close to 30 years in the insurance and financial planning industry and has held licenses to sell securities, long-term care insurance, health.  Doug is also a financial blogger addressing the topics of life insurance, annuities and retirement income planning.

Holly Mitchell  &

Holly Mitchell’s background in life insurance insurance goes back to 1985 when she worked for her father who was a New York Life agent. Holly has a marketing degree from Auburn University and has had a life insurance license since 2008. In addition to advising life insurance for customers all around the country, Holly is our website fact checker.

Rob Pinner   &

Rob Pinner is the founder and CEO of Pinner Financial Services servicing all 50 states. Rob started his insurance career in 2002.

Louis LaBash

Results-driven and innovative life insurance professional with 30 plus years of life insurance industry sales and marketing experience. Recognized as a pioneer in the field, leveraging phone and internet channels to exceed personal sales of over $100 million during the first decade of the 21st century. Creator of a highly effective intuitive IUL life insurance sales software that facilitated the sale of millions of dollars of indexed universal policies by numerous life insurance agents. Proven track record as a Managing General Agent (MGA), Life Agent, IUL Life Insurance Sales Software developer, and leading-edge creator of insurance marketing tools, educational content, and delivery systems.

 5 minute read

Fixed-indexed annuities are insurance products that offer three guaranteed benefits for investors:

  1. Guaranteed principal protection.
  2. Guaranteed minimum interest rate.
  3. Guaranteed income when choosing to annuitize.

These guarantees make fixed-indexed annuities a compelling choice for those seeking a balance between growth potential and financial security. It is important to understand the terms and conditions, including any fees or potential limitations, before investing in any financial product.

If you’re like most people, you may be thinking that fixed-indexed annuities offer significant growth without any downside. That is correct. Since you are reading this article, we’ll assume that you are new to annuities. Maybe you’ve been at it a while but never researched the benefits that fixed-indexed annuities offer.

How does a Fixed-Indexed Annuity Work?

A fixed-indexed annuity is an insurance product that offers tax-favored growth and is issued by an insurance company. Although it has similarities with a fixed deferred interest rate annuity, the fixed indexed annuity earns interest based on a stock market index like the S&P 500 or the Nasdaq rather than an interest rate specified by the insurer.

The fixed indexed annuity’s growth rate is based on a “cap” set by the insurer, but the product also contains a “floor” that protects the account holder in a volatile market. Simply put, the insurance company you select is responsible for the risk associated with a down market. Because of the cap and floor contained in this product, your gains will be capped at about 9% (depending on the product), but your account cannot lose any of the principal.

What about Annuity Tax Liability?

The earnings in a fixed-indexed annuity grow tax-deferred. This means that you don’t have to worry about your earnings being taxed until you elect to withdraw money from the annuity. Although you can purchase your annuity with rollover money from an IRA or a 401k, there is no tax advantage.  The tax advantage of an annuity lies in the tax-deferral piece.  

You can also defer taxes when doing a 1035 exchange from a life insurance policy or annuity to a newer annuity.

What are the Features and Benefits of Fixed-Indexed Annuities?

Since the contributions and earnings in your account are guaranteed by the insurance company you elect to purchase your annuity from, there is a high degree of safety with a fixed-indexed annuity.

You can review the insurance company’s financial stability since they are monitored regularly by independent rating agencies like A.M. Best, Moody’s, or Standard and Poor’s

Another benefit to consider is that most Fixed Indexed Annuities are considered flexible premium annuities, which means that the insurance company will accept multiple deposits (contributions) from the account holder over time, unlike a single premium fixed indexed annuity, which only allows one lump-sum payment into the account.

Another benefit that the fixed indexed annuity comes with is known as the “free look” period. The free look period is typically a 30-day period starting on the issue date that gives you time to reconsider your purchase and return it for a 100% refund for any reason.

 

fixed-indexed annuities

 

Credible Reasons to Consider Fixed-Indexed Annuities for Retirement?

  1. Earn higher interest rates than traditional investments like CDs, Money Market Accounts, or fixed-interest annuities.
  2. No limit on tax-deferred contributions. Account holders can continue contributing to a fixed indexed annuity even when they have maxed out their qualified plans, such as an IRA, 401K, or pension.
  3. Take early retirement without a Penalty. Suppose you are younger than 59 ½ and receive a lump-sum distribution from the company 401K profit sharing plan as part of an early retirement package. In that case, you can roll those funds into a fixed-indexed annuity without worrying about taxable income. After your rollover is completed, you can then start taking withdrawals that are penalty-free by using the IRS-approved 72t rule.
  4. Easily Monitored Required Minimum Distributions (RMDs) When you reach age 70 ½, the IRS requires you to begin taking withdrawals for your IRA or Pension plan. If you do not comply with this rule, the IRS can penalize you 50% of the amount that falls short of your RMD. However, if these funds are rolled into a fixed indexed annuity, your insurance company will monitor this for you at no cost, thus saving you the fee your accountant or attorney would have charged to do this for you.

Fixed-Indexed Annuity Fees

Although fees and charges for managing your fixed indexed annuity will depend on the insurer you purchase your annuity from, there are four fees that are common to annuity products and you need to be aware of them:

  • Insurance Charges – These represent your mortality and expense fees, along with administrative fees. These fees pay the cost of the insurance guarantees that are included in your annuity, along with the selling and administrative expenses of your annuity contract.
  • Surrender Charges – Your insurance company will set a limit on the number of withdrawals that are penalty-free during the early years of your contract. If your withdrawal activity exceeds this limit, you will be charged a surrender charge to cover the expense of commissions the company pays to the insurance agent. Make certain you understand the withdrawal limits so you can avoid surrender charges.
  • Investment Management Charges – These are simply fees that may be assessed on the investment options within your contract and are kind of like mutual fund management fees. The prospectus you receive for your annuity should reveal the charges you might incur for the underlying funds selected for your annuity.
  • Riders – Riders are simply optional guarantees that you are allowed to add to your annuity. There are several riders available to the account holder, and each of them adds an additional cost to your account that will be deducted accordingly.

Getting the Best Value out of Your Fixed-Indexed Annuity

It’s certainly a good thing when consumers perform due diligence on investment products they are interested in. Your research should not replace speaking with an investment professional who has years of experience and understands fixed-indexed annuities from top to bottom. In most cases, having an insurance professional assist you with choosing an annuity that will be the best solution for your financial circumstances is a better method than taking on risk investments alone.

 

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For more information about Fixed Indexed Annuities, please call us at 1-800-712-8519 and we’ll be happy to discuss.

Frequently Asked Questions

What is a fixed indexed annuity?

A fixed index annuity is an investment product that offers three guaranteed benefits for investors:
1. The account will benefit from gains in the stock market.
2. You are guaranteed a minimum rate of return by the insurer.
3. Your investment is protected if the market goes down.

How does a fixed indexed annuity work?

Similar to a traditional fixed annuity, a Fixed Indexed Annuity is an investment product that offers tax-favored growth and is issued by an insurance company. Although it has similarities with a fixed deferred interest rate annuity, the fixed indexed annuity earns interest based on a stock market index like the S&P 500 or the Nasdaq rather than an interest rate specified by the insurer.

Are there any fees with a fixed indexed annuity?

Fees and charges for managing your fixed indexed annuity will depend on the insurer you purchase your annuity from, there are four fees that are common to annuity products and you need to be aware of them: Insurance, Surrender, Investment Management, and Riders.

author avatar
Doug Mitchell, CLU Independant Advisor
Doug Mitchell, CLU holds a BA degree in Finance from Auburn University as well as having obtained a Chartered Life Underwriter (CLU) designation from The American College in Bryn Mahr, PA. Doug has spent almost 30 years in the life insurance industry and has also held licenses to sell securities, long-term care insurance and home and auto insurance. Doug is a Top of the Table Million Dollar Round Table member (MDRT).  MDRT is a global, independent association of the world's leading life insurance advisors.  For two years, Doug served as President of the Auburn Opelika Association of Financial Advisors and has been a member of the Million Dollar Round Table. He obtained Life Millionaire status at Horace Mann Insurance Company and was awarded the Life Agent of the Year Award. Later in his career with New York Life he was an Executive Council Member. Doug currently serves as President of Ogletree Financial, a managing general agency serving life insurance agents and clients in all parts of the United States. Today, Doug’s main focus is servicing 1000s of policyholders and growing the agency through the reach of  insurancequotes2day.com.

2 Responses

  1. I am interested in learning more about indexed annuities. I have an IRA I would like to roll over.

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