A Look at Fixed Index Annuities

By Blanke Schein Wealth Management on January 5, 2018

Examining how these insurance products are structured and their potential.

Provided by HighTower Palm Desert

A fixed index annuity offers you an alternative to a Wall Street investment.

It is an insurance product structured with two goals in mind: principal protection and market participation.

Fundamentally, a fixed index annuity is a contract you sign with an insurance company.

You buy the annuity (i.e., fund the contract) with a lump sum, which goes into the insurance company’s general fund. The return of the annuity is linked to the performance of a major stock market index (typically the S&P 500).¹

The insurer promises you that there will be no downside.

It offers you a guarantee that you will not lose any of your principal over the term of the annuity contract.¹

There is a tradeoff for this promise: a limit to your upside.

The return of the annuity will not match the return of the linked index. The return of the annuity is based on a participation rate – the percentage of the index’s return that the insurer credits to the annuity. If the S&P 500 gains 10% during a particular year, a fixed index annuity with a 70% participation rate returns 7%. Some annuities have hard caps on their returns, limiting your annual index-linked credit to 5% or some other ceiling. (A cap can be instituted at the insurer’s discretion if none exists.)^1,2

If you are leery of Wall Street, a fixed index annuity allows you the potential to benefit from stock market gains without getting hurt by stock market losses. On the other hand, there is the risk that its return may be subpar compared to equity investments.

Anyone investing in an FIA should understand the commitment involved.

The first step is transferring a lump sum of money into the hands of an insurance company, which will hold onto it for the length of the annuity contract. (Some annuities are lifelong.) Fixed index annuities are sometimes described as illiquid, but the fact is that you can usually withdraw up to 10% of their principal in any year. Should you need to withdraw more than that within the first decade of the annuity contract, however, you might have to pay surrender charges and give up some investment gains.¹

Fixed index annuities are not considered securities.

That means the Securities & Exchange Commission does not regulate or oversee them. Neither does the Financial Industry Regulatory Authority (FINRA). Instead, state insurance departments assume that responsibility.²

Robert L. Schein, AIF
Partner, Managing Director
HighTower Palm Desert
The Blanke Schein Group

Citations.

1 – aarp.org/money/investing/info-2017/fixed-index-annuities-jbq.html [10/17]
2 – fidelity.com/viewpoints/retirement/considering-indexed-annuities [9/15/17]

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HighTower Advisors do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information. Tax laws vary based on the client’s individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor before establishing a retirement plan.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.