Introducing The Fixed Index Annuity
If you are looking at low risk investment options you will most likely come across Fixed Index Annuities (also known as variable annuities). Annuities are getting some recent attention from investors who are weary about putting their money into the stock market. Annuities are insurance based products and the principal of your investment, is secure. Returns are guaranteed at a minimum rate and are paid out once you turn 59 ½ years, for a certain time period, in equal installments.
With Fixed Index Annuities the rate of return is based somewhat on the market, as your rate of return will fluctuate as the market changes. Your return on your investment will be set forth in your contract with the insurance company. It will be fixed in terms of when you start receiving your payout, how long you will receive it and what amount you will receive in each installment. Your minimum rate of return is guaranteed, usually somewhere between 3% and 5%, but can be higher in times of a rising stock market. You should always be sure to read the fine print and understand all terms before making your investment.
While a Fixed Index Annuity may seem like a great investment it is important to understand exactly how they work, before making an investment decision. For some individuals it is a wise investment, but for others it is not a great choice.
All funds that you invest into a fixed index annuity are guaranteed and are tax deferred until they are withdrawn. This allows the funds to grow at a reasonably fast pace. Some annuity funds do allow a onetime per year withdrawal of up to 10% without penalty, but otherwise there are high penalties for withdrawing funds early. Most funds must be active for a minimum of 7 years before withdrawals can begin and the person holding the account must also be at least 59 ½ to withdraw funds.
For people looking to make short term investments or for those who may need to get to the money quickly, this is not a wise investment to make. Additionally, the fees associated with these types of annuities make them more suitable for certain types of investments than others. You will not make quick money on these types of fund and it is wise to look at fixed index annuities as a money management tool rather than an investment tool.
Fixed index annuities are a good investment for those individuals who are looking for a long term investment that does not require much risk. They are especially good plans for those individuals who are looking for a means to securely fund their retirement. Once you reach 59 ½ and are in the payout phase you will have consistent payments.
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Fixed Index Annuities (FIA) and Variable Annuities (VA) are two completely different animals. Both of these products are typically purchased through an investment professional although it is not required.
First off, an FIA is almost never registered as a security and thus requires only a life insurance license (as opposed to a FINRA license…6 or 7) to sell. Also, FIA products are typically positioned as an alternative to cash and/or fixed income where the focus is on return of principal (plus potential return).
VA products on the other hand are prospectus based and regulated by the SEC. They are much more susceptible to stock market volatility and are typically sold with “living benefits” that should provide lifetime income to the investor.
Only advisors who hold both a life and a securities license can invest a client’s money in a VA.
One is not technically better than the other and each investment should be made based upon the buyer’s situation as well as the products ability to deliver the desired result. That being said, there are significant differences between the two that cannot be ignored.