Frequently Asked Questions
The following questions and answers have been compiled by The Indexed Annuity Leadership Council. For more information on the IALC, click the link below:
What is an annuity?
In the most basic sense, an annuity is a contract between you and an insurance company that says you will pay for the annuity in either a single lump sum or multiple payments over time. In return, the insurance company promises to make payments from the annuity to you in a single or series of payments.
What is an FIA?
A Fixed Index Annuity (FIA) is a contract between you and an insurance company where the potential interest earned is linked to an external equity index. FIAs can provide a steady, guaranteed* income stream.
What does "fixed" mean?
Fixed annuities, unlike variable annuities, offer a guaranteed* minimum rate of return. You are paid a guaranteed fixed amount that doesn’t vary, regardless of market swing. The insurance company assumes the risk.
What does "indexed" mean?
The index, such as the S&P 500 or the Dow Jones, is used as a benchmark to credit interest. However, you do not actually invest in the stock market, offering protection against market volatility.
What makes an FIA different?
FIAs offer the opportunity for growth and a steady, guaranteed* lifetime income stream, while protecting the principal from the uncertainty of market volatility. These benefits can help you moderate risk and reward, as you plan your long term financial future.
How is an FIA different from a variable annuity?
FIAs guarantee a reasonable rate of return, regardless of market swing; whereas the rate of return for variable annuities depend on the stock, bond, or money market investment. The insurance company assumes the risk for FIAs and the consumer assumes the risk with variable annuities.
How does an FIA add long term balance to a retirement strategy?
Diversifying your assets means balancing risk and growth. That means protecting your retirement nest egg from the steep downsides of a volatile stock market. With FIA products, your principal can never decline from market loss, but it can grow with a rising index. And because they are insurance products, indexed annuities can offer a guaranteed income for your lifetime.
How does an FIA respond to the stock market?
An FIA uses a formula to calculate annual interest based on the performance of a stock, bond or commodity index. The index is used as a benchmark; however, you do not actually invest in it, offering balance and protection against the ups and downs in the market.
What are the potential earnings associated with an FIA?
Your interest earnings rate always remains somewhere between the interest rate floor (the minimum interest that will be credited each period) and the cap (the maximum interest rate that will credited). Earnings won’t rise above the cap, even if the index goes higher. Earnings never fall below zero, even if the index goes way down.
What are some benefits to choosing an FIA?
FIAs can provide a steady, guaranteed lifetime income stream. Additionally, FIAs provide balance and help you moderate risk in your financial plan. Different FIAs have different methods for helping the insurance company manage the risk, including participation rates (the percent of an index that will be used to calculate interest credited) and a spread (the amount that comes off the top before any interest gains are credited) or fee. While these methods can limit your earnings, they also help ensure earnings never fall below zero.
Is Social Security the only consistent source of income in retirement?
No, FIAs can provide a steady, guaranteed* lifetime income stream.
*How are Fixed Indexed Annuity guarantees backed?
Annuity guarantees rely on the financial strength and claims-paying ability of the issuing insurer and are not guaranteed by any bank or the FDIC. Be sure to ask your insurance licensed professional about the rating of any issuing insurer (ie insurance company) given by companies such as A.M. Best, Moody's, Fitch and Standard & Poor's.
What is an "A" Rated Insurance Company?
"Generally, an “A” rated insurance company is considered one that performs at the top of its industry in creditworthiness (the ability repay creditors and pay any claims presented) as well as how it performs financially when compared to its peers. Of the major rating organizations, many give ratings ranging from “A” or above to a “C” or “D” rating (C or D ratings are considered very weak.) " — Janet Hunt, The Balance, April 16, 2019