Fixed indexed annuities (FIAs) are designed to provide investors with a low-risk way to earn a reasonable rate of return on their investment while still providing protection against market volatility. In this article, we will explore what you need to know about fixed indexed annuities and when they can be a positive addition to your investment portfolio.
What is a fixed indexed annuity?
How do fixed indexed annuities work?
When you purchase an FIA, you are essentially buying a contract that promises to pay you a return on your investment that is based on the performance of its underlying index.
Unlike variable annuities, fixed indexed annuities are not actually subject to market risk. FIAs work by crediting interest to the policy owner based on the terms outlined in their particular contract. Sometimes the credited interest amount is capped, but some FIAs are uncapped. Some policies have a floor or a minimum interest rate that gets credited to the policy regardless of how the market performs.
One of the most appealing aspects of FIAs is that the credited interest amount—usually credited annually but sometimes more or less often—gets added to the contract’s principal, so the growth of the FIA has the chance to compound. And with any FIA, even if the market experiences a significant downturn, your principal will not be affected based on the strength of the insurance company issuing your contract.
Why choose a fixed indexed annuity?
In addition to their low-risk profile, FIAs also offer other benefits, such as tax-deferred growth, guaranteed minimum rates of return and the ability to provide a steady stream of income during retirement.
Some annuities offer lifetime income either as part of the policy itself or as an optional rider to it for an additional cost. For healthy retirees worried about longevity and running out of money at some point, this can be a welcome feature, but it may not make sense to invest a lot of money in an annuity if you are not well. Some annuities offer a death benefit option, so that if you pass away early, your heirs at least receive some benefit from your purchase.
Conclusion
The commentary on this site reflects the personal opinions, viewpoints, and analyses of the author, Nolan Stokes, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”) or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security, or any security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Foundations deems reliable any statistical data or information obtained from or prepared by third-party sources that is included in any commentary, but in no way guarantees its accuracy or completeness.
