SAFE MONEY ALTERNATIVES
Safe Money is "The Money You Can Not Afford to Lose" For terminology you do not understand please visit our terminology page
What is the first thing that comes to mind when you think of keeping your money safe? Most people automatically think of the banks. Keep this in mind as you read further: Banks offer minimal growth to your money; while annuity rates allow for earning potential to be much greater. The banks are not the only place for your safe money and they are not the safest place either. If you are not keeping up with inflation, you are losing money..... Over the past several years our economy has gone through some major changes, most of which have affected the majority of Americans’ retirement accounts. Fixed Annuities are a great way to counter the negative economic situation financially through education.
A safe Money Alternative:
A Fixed Index Annuity (FIA) is a fixed annuity with an interest rate that is linked to the performance of a stock index (S&P500 or NASDAQ for example). The annual credited interest rate can increase depending on the market index but can never be less than zero should the market decline. A fixed index annuity offers safety of principal, a guaranteed minimum return, and the ability to participate in market gains through an index-linked interest rate. A fixed index annuity has many features such as participation rates, interest rate caps, and potential administration fees. There are also many methods used to calculate and credit interest such as the point-to- point, high-watermark, averaging, and annual reset indexing methods. Features and indexing methods directly affect a fixed index annuity's potential return.
- Guarantee future income account growth between 5 and 10% annually.
- Defer paying taxes every year on your retirement savings.
- Have the opportunity to participate in market linked gains while avoiding any potential for market loss.
- Guarantee interest gains and lock in those gains every year Who Buys a Fixed-Index Annuity?
People purchase a fixed index annuity because they are not satisfied with the returns from their CD’s and annuity rates that are fixed, and don't have the time for the stock market.
If you have sufficient time to recover from potential losses, direct stock market investments should give you a higher return than a fixed index annuity. However, if your time frame is too short to recover from a potential bad market, or you simply don't like the idea of possibly losing principal, a fixed index annuity are used as an alternative saving vehicle to bank instruments, fixed rate annuities, bonds and mutual funds. If you can wait on the funds and still need the investment to be fixed, try a deferred annuity.
Are all Index Annuities the Same?
No. Index annuities have different penalties for early withdrawal, may offer different options for indices, and one index annuity probably credits interest at a different rate from another.
Some index annuities credit interest each year, some wait until the end of a longer period, some average the index values, others set a cap or maximum on the interest that may be paid, and some guarantee all of the fees or moving parts will not change, while others have the flexibility to adjust. What this means is one company could offer 100% participation in their way of calculating interest, and still credit less interest than another company that participates in 60% of a different method. Or, a company with a 3% asset fee could pay more than another company quoting a 0% fee.
Are Fixed Index Annuities Safe?
The simple answer to the question presented above is, "Yes!" Both principal, annuity rates, and credited interest are protected from index declines, so the worst thing that could happen is the stock market drops for years, and you still get back your principal plus a little interest. The fixed index annuity is as safe as the insurance company issuing it. States and independent rating firms examine financial books of insurance companies on a regular basis. They make sure that there is enough money to cover everything, which is why you rarely hear of an insurance company going bust. If a company did go out of business, other insurance companies would assist with the fixed index annuity contracts of the troubled company. Also, every state has a guarantee fund to dip into and protect annuity contract owners, within certain limits.
How are Fixed Index Annuities different from other fixed annuities?
A fixed index annuity can be described as a hybrid of fixed annuities and variable annuities, having some characteristics of both, and falling in between regarding the potential for return and levels of risk. With traditional fixed annuities, the annuity issuer guarantees the rate of return. Investors in fixed annuities elect safety of principal and guaranteed returns over market risks and the potential for higher returns. With a variable annuity, the rate of return varies according to the performance of the investments you choose from those offered by the issuer. With the exception of a guaranteed sub account, variable annuities do not offer any guarantees on the performance of the sub-accounts. You assume all the risk related to those investments including the risk of losing principal. In return for assuming this greater amount of risk, investors in variable annuities have a greater potential for growth in earnings. A fixed index annuity takes the middle ground, offering limited downside risk balanced by limited upside potential for returns. They offer safety of principal and, generally, a minimum rate of return if the fixed index annuity is held for the full term.
A Fixed-Index Annuity is different from other fixed annuity contracts because of the way it credits interest to your annuity's value. Fixed annuities only credit interest calculated at a rate set in the contract. Fixed index annuities credit interest using a formula based on changes in the index to which the annuity is linked. The formula decides how the additional interest, if any, is calculated and credited; how much additional interest you get and when you get it depends on the features of your particular annuity. The Fixed-Indexed Annuity, like other fixed annuities, also promise to pay a minimum interest rate. The rate that will be applied will not be less than this minimum guaranteed rate even if the indexed-linked interest rate is lower. The value of your annuity also will not drop below a guaranteed minimum. For example, many single premium contracts guarantee the minimum value will never be less than 90 percent of the premiums deposited, plus at least 3% in annual interest (less any partial withdrawals taken during the contract period). The minimum guaranteed value is the minimum amount available at the end of the term.
How Do Fixed-Index Annuities (FIAs) Work?
As with fixed annuities and variable annuities, a Fixed Index Annuity is a contract between you and an insurance company, in which you pay premiums and the issuer promises to make periodic payments to you in the future.
You can pay premiums in one lump-sum or in installments over time. What makes a fixed index annuity unique is that they offer a minimum guaranteed interest rate, but allow for the possibility of higher earnings by linking the interest rate calculation to the performance of an equity index. Interest is calculated using a formula based on changes in the index. The terms of the Fixed Index Annuity contract dictate how interest is calculated and when it is calculated.
How do I know which Fixed-Indexed Annuity is best for me, and make the best product decision?
As with any other insurance product, you must carefully consider your own personal situation and how you feel about the choices available. No single annuity design may have all the features you want. It is important to understand the product benefits and trade-offs, so you can choose the annuity that is right for you. Keep in mind that it may be misleading to compare one annuity to another unless you compare all the other features of each annuity. You must decide for yourself what combination of features makes the most sense for you. Also remember that it is not possible to predict the future behavior of an index. If you feel a fixed index annuity may be right for your situation; consulting with a trusted Safe Money Advisor will make product selection and the accomplishment of your goals a much simpler process.
Since interest is based on an index, isn't this similar to a variable annuity?
No, if a variable annuity account goes down, you could lose principal. Index annuity principal is protected from market risk - you can't lose principal if the index declines. Variable annuity gains are not locked in. Once index-linked interest is credited in an index annuity it can not be lost, even if the index declines substantially. Variable annuities also include reinvested dividends but neither the index nor index annuities reflect reinvested dividends.
So Do I Get All Of The Index Gains?
No. As you have annuities explained to you, you learn that it costs the insurance company to provide this protection against loss. This means that you will not fully participate in all of the gains when the market goes up and you will not lose principal in a falling market.
What are some of the Pros to FIAs?
- They offer safety of principal and generally guaranteed minimum returns.
- They offer tax deferred growth.
- They have no annual contribution limits as long as they are flexible premium FIAs.
- There is a guaranteed death benefit for your beneficiaries.
- There are no penalties for mandatory distributions at age 70 ½.
- They give you the option of receiving a guaranteed income for life, called annuitization, or may offer a Guaranteed Minimum Income Benefit (GMIB) for life without having to annuitize.
- They may avoid probate.
- They allow for participation in market increase.
What are some of the Cons to FIA's?
- Your participation in market increases is limited.
- Feature variations can make choosing the right FIA challenging.
- When withdrawn, earnings are taxed as ordinary income based on your tax bracket at the time of withdrawal.
- Withdrawals made prior to age 59 ½ are generally subject to a 10% penalty unless certain circumstances apply.
What kind of interest will I earn?
Index annuities are designed to provide a return somewhere between stock market vehicles and savings instruments, or somewhere between mutual funds and CDs. Because interest is linked to movements of an index, there could be periods when the index annuity credits double digit interest rates, and years when zero is credited. Index annuities were created with the intention of providing a more realistic potential for higher interest rates than other instruments that protect principal from market risk.
Urgent...Questions You Need to Ask Your Financial Advisor Or Insurance Company Before Making Any Financial Decisions?
- Is this a single premium or flexible premium contract?
- Is this a Fixed-Indexed Annuity?
- What is the initial interest rate and how long is it guaranteed?
- Does the initial rate include a bonus rate, and how much is the bonus?
- What is the guaranteed minimum interest rate?
- What renewal rate is the company crediting on annuity contracts of the same type that were issued last year?
- Are there withdrawals, surrender charges or penalties if I want to end my contract early and take out all of my money? If so, how much are they?
- Can I get a partial withdrawal without paying surrender charges for reasons such as death, confinement in a nursing home or terminal illness?
- Is there a market value adjustment (MVA) provision in my annuity?
- What other charges, if any, may be deducted from my premium or contract value?
- If I pick a shorter or longer payout period or surrender the annuity, will the accumulated value or the way interest is credited change?
- Is there a death benefit? How is it set? Can it change?
- What income payment options can I choose? Once I choose one payment option, can it be changed?
The diversification of your money is one of the most important concepts to understand within your financial plan.
If you feel a fixed index annuity may be right for your situation; consulting with a trusted independent Safe Money Advisor could make product selection and the accomplishment of your goals easier and more beneficial.