Updated December 15, 2021, at 3:23 PM
Building a financial strategy in today’s challenging market environment can be tricky. Today more than ever, retirees are struggling to feel reassured about their retirement savings.
In recent years, fixed indexed annuities (FIAs) have gained popularity in the retiree market by offering guarantees to income with potential for indexed interest accumulation and in our industry have often been referred to as “sleep insurance” for retirees. That often makes financial advisors wondering “Is a FIA right for my client?”
With pensions no longer being offered by the majority of employers, fixed indexed annuities are a way to help create a stable and reliable income in retirement.
But before you recommend an FIA for a client’s portfolio, there are some things to know and consider.
Benefits of FIAs
- A fixed indexed annuity is a contract between an insurance company and a retiree. The contract is funded by multiple payments over time or by a single lump sum payment.
- Interest may be credited to an FIA at the end of each reset period. In most cases this is every 12 months, however, some contracts do offer longer reset periods. Interest earnings, typically subject to a limit, are tied directly to the upward movement of a specific index which is elected by the client at point of sale. Most index strategies offer a cap, participation rate, or spread based strategy.
- All fixed indexed annuities have a 0% floor. This means regardless of market performance, a client’s principal will always be protected from any downturns in the market. That’s a great thing to have during market volatility.
- Once interest is credited to an FIA, it won’t be lost due to future fluctuations in the market. An important factor to remember is that although interest is credited based on the movement of the index, the money is never directly invested in the stock market.
- Interest in FIAs can compound year over year and interest credited is tax-deferred; which means as earnings are credited, no taxes are due until the funds are withdrawn from the annuity contract. You should inform your clients that early withdrawals may result in loss of principal and credited interest.
- Aside from offering tailored indexing strategies, fixed indexed annuities may come with a wide variety of bonus options, living / death benefit riders, and surrender charge periods.
- Bonuses are a great way to help clients jump start their retirement income and could help recoup losses on money invested in the market. Living benefit riders (LBRs) often guarantee a specific percentage of growth or potential growth based on market performance each year in an income account.
- Growth in the income account occurs while the annuity is deferred or no withdrawals are being taken.
- Living benefit riders can allow annuities to create a pension-like income payable as long as the contract owner is living.
- Death benefit riders can also be used to help maximize retirement income upon the passing of the annuity contract owner. Like a living benefit rider, death benefit riders grow by either a guaranteed percentage of growth or the potential growth based on market performance each year in an income account.
- The surrender charges on FIAs range typically between 5 to 16 years, which allows clients the ability to select the time horizon that favorably suits their needs. There are many fixed indexed annuity products and features to choose from.
Ending Thought on FIAs
Overall, FIAs can offer safety and stability for retirees and allow them to have balance and help provide a solution during their retirement years.