What is a Fixed Index Annuity?

Annuity Resources

What is a Fixed Index Annuity?

Regardless of where you are on your road to retirement, like most people you want to protect your hard-earned money and see it grow.

But in today’s low interest rate environment, safer investment products like CDs, money markets and bonds may not provide the growth potential you need for retirement planning. You can turn to the stock market, but that might mean taking on more risk than you’re comfortable with.

What if you could have both protection and growth from a single core portfolio investment?

You can, with a fixed indexed annuity.

Below are answers to some of the most frequently asked questions about this popular product.

What is a fixed indexed annuity?

A fixed indexed annuity (also referred to as an FIA) is a long term tax-deferred financial tool offered by insurance companies. Your account value is protected against market loss, but has the opportunity to grow by earning interest based on the performance of an index or indices that you choose. When you feel the time is right to start receiving income payments, you can also turn on available lifetime income features.

To help balance the value of the downside protection, the insurance company imposes an upper limit, or “cap,” on the amount of interest you can earn in a given period. But again, it’s important to remember, you cannot lose money based on market declines. It’s that peace of mind that makes fixed indexed annuities so attractive.

Would I have the flexibility to access my money if I need it?

Fixed indexed annuities are designed to be used as long term conservative investments that can act as the anchor to a financial plan. However, if you need to withdraw money, you can. Keep in mind, however, that depending on how much you take out and when, you may incur penalties and/or fees. These can vary by product and state. Ask your Knight financial professional for details.

How does a fixed indexed annuity work?

Fixed indexed annuities typically offer you an index-based growth option that credits your account with interest based on a cap rate or participation rate strategy.

With index-based strategies, your money has the potential to grow based on the performance of one or more market indices, such as the S&P 500®. The interest rate you can earn is usually calculated over a predetermined time period and can vary based on the features of the annuity, including the option to allocate your money into a strategy based on a cap rate or participation rate. A cap rate is the upper limit of interest that can be credited during the term. A participation rate is also an upper limit on what can be credited, but is based on a specified percentage of the index’s performance. Cap rates and participation rates are set at the time of your initial contract purchase and reset after each term.

Your principal and earnings are protected from loss. The floor prevents your annuity from losing value even if the index declines during your term. Your principal and any interest credited are protected. You cannot lose money based on market performance.

How will a fixed indexed annuity affect my taxes?

Annuities are tax deferred investment vehicles. You pay no taxes on any interest you earn until you make a withdrawal, so more of your money stays invested, any interest credited can continue to compound, and your assets may accumulate faster than with taxable investments like CDs.

Is there a death benefit with a fixed indexed annuity?

Yes. Fixed indexed annuities offer a built-in death benefit for your loved ones that enable you to leave a legacy if you pass away. Depending on the product, there are a variety of options for beneficiaries which may include payment of a lump sum, regular income payments, deferral of receiving the death benefit, or taking over ownership of the annuity contract. Your Knight financial professional can provide you with product-specific information.

Why choose a fixed indexed annuity?

A fixed indexed annuity can be a smart choice as part of your overall financial strategy for several reasons:

  • You can benefit from protection, while still maintaining the opportunity for growth
  • You can earn interest based on the performance of your selected indices without the risk of actually being invested in the stock market
  • Your money is protected from any market downturns (assuming you abide by the terms of the contract)
  • Your money can grow faster with the power of tax deferral
  • You have access to your money at any time during your contract term – penalties and/or fees may apply depending on when and how much

Your financial professional can provide you with in-depth information about the various fixed indexed annuity options available and help you determine if one is right for you.