People are always looking for the perfect investment. Clients want to earn the highest interest possible without putting any of their money at risk. These types of investments have never existed … until now. A Fixed Indexed Annuity (FIA) is a guaranteed insurance product that offers above average returns with no market risk to principal and no management fees ever. In this historically low interest rate environment, many clients are reconsidering where to park their hard earned cash for the long haul. Certificates of deposit, savings accounts and money markets are literally paying next to nothing and the stock market is at the highest levels in recorded history. So where can clients position their money and earn superior returns without worrying about losing a penny? FIAs offer real double digit returns in up markets without any risk to principal in down markets. Folks everywhere are not only taking notice, but investors are flocking to FIAs. No one can predict the future and this is the reason why a FIA should be considered by clients who are looking for peace of mind regardless of what happens in the Wall Street casino.
What is an FIA?
According to the Indexed Annuities Leadership Council, a Fixed Indexed Annuity (FIA) is a contract between the client and an insurance company. FIAs offer tax-deferred growth based in changes in a market index all while protecting your hard-earned principal from the uncertainty of market volatility. Plus the option to convert your annuity into a guaranteed lifetime income stream is always available.
Interest is calculated using a formula based on changes in the performance of an index like the S&P500 and/or the NASDAQ100 that the client selects annually. The index is used as an external benchmark so clients do not actually own the fund which is why their principal is protected from market risk. When the index is up, the options are exercised and the client earns interest, usually subject to a cap. When the index is down during the same time period, the options are allowed to expire and the client is credited the contract’s minimum guarantee.
How an FIA Works
Generally, Fixed Indexed Annuities (FIAs) are exactly the same as traditional guaranteed Fixed Annuities except with one major difference. The FIA allows the client to participate in an external index via the carrier’s trading desk that purchases options against the index either monthly or annually. The FIA has an minimum guarantee rate or interest rate floor, which is the minimum interest that will be credited each period typically 0%. The FIA has a participation rate which is the percentage of an index return that will be used to calculate the interest crediting and this should be 100% if available. Finally, there is the cap rate which is the maximum interest that will be credited in the contract period either monthly or annually. Together, the interest rate floor, participation rate, and cap rate determine the amount of interest a client earns. The client’s annual interest rate will always remain somewhere between the floor and the cap. It will not rise above the cap, even if the index goes higher than the cap. Conversely, the FIA value will never fall below zero, even if the index decreases in value. In fact, the value of your annuity will never decline due to negative market index returns for the life of the contract. Although the FIA can increase with a rising index, there is never any risk to principal or of losing any prior year credits because they are all automatically reset into the contract on the anniversary.
Free Withdrawal Provision is available usually after one year of deferral and each year thereafter, during the surrender charge period, such that the client may withdraw up to 10% of the premiums paid as of the prior anniversary, less any free withdrawals taken during the current contract year, without paying a surrender charge.
Nursing Home Benefit is available usually after one year of deferral, should the client enter an eligible licensed nursing home and the confinement for more than 60 consecutive days, surrender charges will be waived on withdrawals made during the period of confinement.
Terminal Illness Benefit is available usually after one year of deferral, such that if a licensed physician certifies that the client has been diagnosed with an illness or condition that causes his or her life expectancy to be less than one year, surrender charges will be waived on withdrawals during this period of terminal illness.
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