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The Impact of Market Slides on Variable Annuity Investors

 impact of market slides on variable annuity investors

U.S. equity markets have taken investors on a wild roller-coaster ride over the last several days. Equities started free-falling after U.S. wage data released on Friday, Feb. 2, showed positive results. While economic news continues to be good, it raises the specter that the Fed will raise interest rates to ward off inflation. 

Higher interest rates would result in higher borrowing costs for companies and businesses. Not only that, it would become more expensive for consumers to buy cars and homes. 

It turned out that Friday’s drop was just the tipping point. The stock market went on a wild ride again on Monday, with the Dow Jones Industrial Average closing down 1,175 points. This represented the worst point drop in history. And at one point Monday afternoon, the Dow was down 1,579 points, which was the largest intraday point drop in the history of the index.

If all this market anxiety had you reaching for the Dramamine, you aren't alone. Most people are invested in the market in one way or another. So, many households felt the sting, and it has only slightly abated as the market has begun to recover some of its losses.

A Wake-Up Call on Market Risk?

Considering the personal impact of market losses,  investors holding variable annuities in their portfolios may see some strong after-effects. Variable annuities place the risk of investment losses squarely on the individual investor.

Variable annuities, introduced in the 1950s, allow investors to put money into professionally managed subaccounts. Generally, these subaccounts tend to consist of various asset classes, including stocks, bonds, and money market funds. Investors with variable annuities are pursuing an opportunity to earn higher rates of investment growth. In turn, that can potentially increase their accumulated capital and provide a variable income stream to hopefully outpace inflation.

By holding variable annuity contracts, people seek growth opportunities that are greater than that of other instruments. That may include fixed annuities and their interest-crediting potential. But when variable annuities drop in value, the results can be less capital accumulation and a smaller income stream.

The Clarion Call of Safety

One result of a volatile stock market, and industry analysts bantering about warnings of a potential future “severe market correction,” is individual investors taking a deeper look at their investment horizon. With all-time record drops, many are reminded that they might want to ease off their aggressive-investment pedal. Among variable annuity owners, part of that consideration may be a closer look at fixed annuities.

People seeking a "safer" alternative to variable annuities may appreciate fixed annuities for a number of reasons. They can be a good option for parking (and protecting) retirement money — something that may reasonate with investors approaching retirement or planning for their golden years.

Fixed annuities, like fixed indexed annuities (or FIAs), offer the same income guarantees offered by variable annuities. With a fixed index annuity, you won't lose a cent of the money you put in due to market risk, as your premiums aren't actually put into the market directly.

Rather, the insurance carrier credits interest to your contract based on changes in an index. The majority of fixed index annuities are linked to the S&P 500 price index. However, other indices may also be available for selection.

When the index goes up, a fixed index annuity is credited interest based on some of that index growth. However, if an index goes down, the insurer won't credit anything less than zero interest to your contract. Hence, many annuity buyers use these types of fixed contracts for the purpose of financial protection.

The Insurance Company Shares the Risk

A fixed indexed annuity (FIA) is essentially a contract between an individual and an insurance carrier. It offers distinctive benefits that include index-linked interest potential, optional benefits like guaranteed income, and tax deferral.

Knowing that your principal and credited interest are safe from index losses, no matter what the index does, can be comforting indeed. Another major reason for why many people have FIAs is that these contracts can provide income you can’t outlive. Your principal won't be eroded by index declines, and in many contracts, you won't have to deal with variable-annuity-like fees, as the costs of service are built into the contract design.

Additionally, you may be guaranteed a stream of income for as long as you live. Add to that some access to capital for liquidity (but a trade-off is annuity surrender periods), not to mention some legacy benefits, and we can see why fixed index annuities are widely used as retirement vehicles.

Points to Consider When Pivoting to Fixed Annuity Contracts

Of course, there are trade-offs for this principal protection. Growth potential for fixed-type contracts like fixed index annuities may be limited by caps, participation rates, or spreads.

According to the Financial Industry Regulatory Association (FINRA), the index-linked interest rate computed on an FIA depends on the particular combination of indexing features that the annuity uses. These include:

  • Participation rates, which determine how much index growth will be credited to the annuity;
  • The spread, margin, or asset fee that some FIAs use in addition to or instead of a participation rate. These terms refer to the same thing. This percentage will be subtracted from any value increase in the index linked to the annuity;
  • Interest rate caps put on an individual’s annuity interest-crediting potential. The cap rate is typically stated as a percentage.


The National Association for Fixed Annuities reports a number of key motivators for choosing FIAs. Those motivators include saving money for retirement; saving money for business partners, loved ones, or charities at death; and saving for planned and unplanned expenses.

As with all types of annuities, guarantees are backed by the financial strength and claims-paying ability of the insurance company.

Need Personal Guidance for Your Financial Situation?

If you are planning for or close to retirement, you may seek changes to your portfolio strategy. Your risk tolerance may have changed from earlier years. Recently volatility may be hard to shrug off. Or you may need to optimize your existing strategy to provide for efficient, dependable income in later years.

Whatever your goal, it's important to work with a financial professional who understands retirement planning issues. They should also act in your best interest when providing retirement advice. Someone who fits these molds can make a real difference in planning for the future.

If you are ready for personal retirement guidance, help is just a click away. Use our "Find a Financial Professional" section to connect directly with a financial professional. Should you have any questions, concerns, or need a personal referral, call us at 877.476.9723.

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