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Is a Fixed Index Annuity (FIA) Right for Me?

Before determining if an FIA is right for your retirement strategy, make sure you understand the specific product features and if the benefits ladder into your goals.

If you…

  • Have a retirement income plan in place, but want to add balance to the mix

  • Want your retirement assets to never fall below zero

  • Want growth potential

  • Want principal protection when the market goes down

…then an FIA might be right for you.

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What is a Fixed Index Annuity (FIA)? 

A fixed indexed annuity (FIA) is a contract between you and an insurance company. FIAs offer the opportunity for tax-deferred growth based in part on changes in a market index, plus the option to convert your annuity into a steady, guaranteed, lifetime income stream, all while protecting your hard-earned principal from the uncertainty of market volatility.

 

Fixed indexed annuity guarantees are based on the on the financial strength and claims-paying ability of the issuing insurer. Ask your insurance licensed professional about the rating of any issuing insurer from companies such as  A.M. Best, Moody's, Fitch and Standard & Poor's.  

When purchasing an FIA, you agree to pay for it in either a single lump sum or multiple payments over time. In return, the insurance company takes the risk of market downturns to help protect your annuity value and also promises to make payments from the annuity to you in a single payment or series of payments, over a fixed number of years.

Money in an FIA earns interest based on changes to the index. Interest is calculated using a formula based on changes in the performance of stocks (such as S&P, Dow Jones, NASDAQ), bonds (example: Capital Markets Bond Index), or commodities ( example: CBOE). The index is used as an external benchmark – you do not actually invest your funds in it.

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How a Fixed Index Annuity (FIA) Works

Generally, fixed indexed annuities (FIAs) have

  • An interest rate floor, which is the minimum interest that will be credited each period,

  • participation rate, which is the percent of an index that will be used to calculate interest crediting,

and/ or

  • A cap, which is the maximum interest that will be credited.

Together, the interest rate floor, participation rate, and cap determine the amount of interest you earn. Your interest earnings rate will always remain somewhere between the floor and the cap. It will not rise above the cap, even if the index goes higher.

 

Conversely, it will never fall below zero, even if the index declines in value. In fact, the value of your money will never decline due to market loss for as long as it is in the FIA, although it can increase with a rising index.

If you withdraw your money from an FIA before an index terms ends, the annuity may not add all the index-linked interest for that term to your account. Additionally, many FIAs have a surrender charge in the early years, the terms of which depend on your specific contract.

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