Annuities are long-term retirement planning tools that can provide steady, predictable income for life—regardless of how the stock market performs or how long you live. A fixed indexed annuity (FIA) offers a way to grow your savings with the potential for higher returns than a traditional fixed annuity, without risking losses when the stock market drops.
Grow your investment and protect from losses
A traditional fixed indexed annuity is tied to the performance of one or more stock market indexes (like the S&P 500®). With an FIA, you are not investing your money directly in the stock market. Your account earns interest based on how the market performs, but with limits and protections against loss:
- If the index goes up, you earn some of that growth as interest. Once you earn interest, it is yours. It won’t go away even if the market drops the next year.
- If the index goes down, you don’t lose money. Your account stays the same, with no gains, but no losses, either.
Balancing income and risk
FIAs let you choose how much income and risk you are comfortable with. They come in several types to match your retirement goals and risk level. As you explore different FIAs, you may notice variations in:
- Cap rates, or the maximum interest you can earn
- How much of the index gain you get, or the participation rate
- The spread, which is a percentage that is subtracted from the index gain before you earn interest
- The length of contract, which may vary from a few years to more than ten
Like all annuities, FIAs have surrender charges, which means you could pay a penalty if you take money out early. Most insurance companies allow penalty-free withdrawals, letting you take out some money without fees. This may be limited to a certain amount or percentage of your contract. Adding a benefits rider to your contract can add flexibility to access money when you need it.
Benefit riders for coverage and flexibility
Many FIAs offer optional benefit riders you can add to customize your annuity contract based on your needs. These benefits take the form of higher payout percentages, more flexible access to your money or enhanced death benefits for your heirs.
Common benefit riders include:
- Guaranteed Lifetime Withdrawal Benefit (GLWB) riders guarantee a steady income for life, even if your account balance drops to zero.
- Guaranteed Minimum Income Benefit (GMIB) riders guarantee a certain minimum level of future income.
- Enhanced death benefit riders increase the amount your beneficiaries receive if you pass away.
- Long term care and illness riders let you access all or part of your annuity without surrender charges if you are diagnosed with a serious illness or confined to a nursing home.
Benefit riders can add value to your FIA, but they usually carry extra fees. Make sure you read and understand your contract carefully, so you know what to expect.
Is a FIA the right choice for you?
Choosing a FIA depends on your retirement goals and your personal finances. A financial professional can help you figure out what is best for you, considering:
- What you want to achieve with your money
- What other savings or retirement plans you already have
- How close you are to retirement
Find a financial professional to see if a fixed indexed annuity fits your financial needs.
