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RETIREMENT SOLUTIONS

Fixed Annuities

Fixed annuities are savings vehicles which protect against the risk of outliving your income. They are insured by licensed & regulated state insurance departments and companies, similar to how your home, auto or health is insured. There are two types of fixed annuities: traditional fixed and indexed annuities.

 

Traditional fixed annuities pay interest on the premium contributed at a rate declared by the insurer in advance.  This rate can never be less than the minimum guaranteed rate stated in the policy.

 

Fixed annuities are conservative safe money place for retirement dollars.  Fixed annuity interest rates are generated from a portfolio of US treasuries or other low risk, fixed income instruments.

 

Indexed annuities are a type of fixed annuity which are regulated and distributed in the same manner as fixed annuities.

 

Indexed annuities are a conservative safe money place for retirement dollars.

 

Indexed annuities usually provide a purchaser with various options for interest crediting. A buyer does have an option to elect a declared interest rate, which generally allows an allocation of anywhere from 0-100% of the account value, and functions the same as a traditional fixed annuity. '

 

However, the annuity is designed for higher potential interest rates, and provides other allocation options which consider the performance of an outside stock index (such as the Standard and Poor's 500, a.k.a. S&P 500) to determine the rate of interest.

 

These options pay interest at a rate determined by a formula which considers any increase in the outside index, often subject to a “participation rate”, and/or “cap, and/or "spread”.

 

All indexed annuities have a floor of zero, meaning the absolute worst case scenario due to a downturn in the market index is a consumer might receive no interest in a particular year, however, he or she cannot lose any previously credited interest or premiums.

 

A policy year is measured from the day the premium is invested and not on a calendar year basis. Interest is credited to the policy only once a year on indexed interest crediting methods. Once interest is credited it can not be taken away in a subsequent year when the measuring index is a negative value. This feature of an index annuity is often referred to as an "annual reset". The "annual reset" provides a second benefit aside from safeguarding the principal and subsequent interest gains, it also prevents the policy from having to recover from any sort of loss to the outside stock index in the previous policy year. For instance, if the S&P 500 index were to drop 40% during a policy year, the annuity would be credited with no interest for that policy year. However, if the S&P 500 had a calculated return of 10% the following year using an annual point-to-point calculation with a 6% cap, the annuity would earn 6% on top of where it had left off the policy year prior. An example of this benefit can be seen in this simple example that ignores dividends:

As required by state insurance law, indexed annuities do provide for a minimum amount of interest. This interest rate is stated in the policy (usually 1% to 3%), but does not apply to 100% of the premiums paid.

Like traditional annuities, indexed annuities have surrender charges. These charges vary from 10% down to 1% and policies can have surrender charge periods ranging from 1 – 14 years.

 

Indexed annuities are retirement savings vehicles and are not meant for short term savings. Most indexed annuities do provide a penalty-free amount that may be withdrawn each year (for example, the right to withdraw 10% of the annuity’s value per year). These products may also waive surrender charges if the policy is annuitized (converted into an immediate annuity that would generate income payments over a specified period of time which is elected by the policyholder). Some annuities provide additional riders to have surrender charges waived (generally at no additional cost) in the event the annuitant is confined to a nursing home or is diagnosed with a terminal illness.

 

In recent years, many indexed annuities can be issued with a rider designed to supply a lifetime income payment to the policyholder that does not require annuitization thus leaving the policyholder in control of the balance of the account. These "income riders" are calculated separately than the indexed annuity itself, however, they use the same initial premium figures for each calculation. An "income rider" generally will provide a specified accumulation rate which is guaranteed for a certain period of years. The "income rider" calculations create an "income pool" which is strictly an accounting figure that cannot be accessed as a single lump sum by the policyholder or beneficiary.

 

The "income pool" continues to grow annually at the specified accumulation rate until such time the guarantee period expires or the policyholder opts to begin taking "lifetime income payments" from the account. Once "lifetime income payments" begin, the "income pool" stops accumulating, and the value of the income pool is used to determine the amount of income that will be paid out annually (it can usually be paid monthly, quarterly or semi-annually as well).

 

As with all traditional fixed annuities, money can be withdrawn from an indexed annuity at any time penalty free up to 10% of the annuity value.

 

Owners may also choose to receive a payment based on the value of the policy for their lifetime (called annuitization).

 

In the event of the owner’s (and the annuitant’s in some policies) death, the beneficiary of the contract usually receives any remaining value in the policy, and if the annuity had been annuitized and additional guaranteed payments remained, subsequent annuity payment would be made to the beneficiary at the same intervals the deceased was receiving them until the guaranteed period has expired.

 

Indexed annuities were first offered   in February 1995.[10] Sales of the products were less than a half billion that year, and have since exceeded $50 billion per year since 2010.  There are 55 different insurance companies offering indexed annuities today and more than 400 different variations of fixed indexed annuities.

 

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** Some of the Information on this site has been derived from different resources such as the National Financial Planning Association, Securities and Exchange and  Commission, Department of Insurance and Investopedia

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