Indexed annuities are a unique type of annuity sold by insurance companies for those looking for a safe place for their retirement funds. The amount of money returned to investors is based off three different variables: guaranteed return, index-based return, and riders. Indexed annuities are pegged to different indices such as the S&P 500. Investors purchase indexed annuities, typically with a lump sum. After a number of years, the annuity owner can begin receiving payments, similar to a pension.
Some annuities have a guaranteed growth rate that will build up each year for the express purpose of generation income during retirement. Income, that you cannot outlive.
While other annuities allow you to purchase a rider that guarantees income growth. The growth will assure an income stream from the annuity as long as you live and you can assure the income will last throughout your spouse’s lifetime as well.
Because there is many choices and options, it is important that you fully understand the various components of an annuity prior to purchasing one.
You want to choose the one that best fits your needs and objectives as no two financial situations are exactly alike.
Indexed annuities have been growing in popularity ever since their inception. In fact, indexed annuity sales are thought to have reached well over $100 billion in 2016. This article will overview some key information regarding annuities so you have a better understanding of the advantages of this investment product.
Indexed Annuities vs. Market Investments
Since many indexed annuities “participate” with a specific index, such as the S&P 500, their returns are tied to market performance.
However, there is a huge difference between indexed annuities and risky investments. Some of these differences will be explained in more detail further on in this article.
If you are directly invested in the index or a mutual fund, you are exposed to the volatility of the market you get the gains and well as suffer the losses.
Losses can be devastating to your financial security.
Annuities “participate” with indexes, but are not directly invested into the index, so your money is always safe and guaranteed.
You can go up with the market, but can never lose when the markets drop.
An indexed annuity reduces your risk of being exposed to major financial catastrophes. In addition, many annuities have a minimum guaranteed growth rate as well, and you get that return no matter what the market does.
Indexed annuities are considered a long-term investment and are of most benefit to investors looking for a guarantee and an income for life – hence their popularity amongst prospective retirees.
This way, you can protect your nest egg and also generate a lifetime of income with no risk to you.
Like Social Security, the longer you wait to access your indexed annuity income, the greater the income.
An income annuity might not be the best fit for you, if you want to take a lump sum out and spend it all at once. They are best situated for monthly or yearly income.
Benefits of Indexed Annuities
Investment Linked to Index
Your investment growth is linked to an index and its corresponding growth.
Although you don’t get 100% of the upside growth of the index, you also do not suffer any losses when the index drops.
This can be an attractive trade off when markets are volatile or as mentioned you want to protect your nest egg.
How much you participate with the index can vary from annuity to annuity, so you’ll want to understand the benefits and drawbacks of different choices.
There are participation rates, caps, spreads and guaranteed growth rates. Each one can be beneficial in the right situation.
Principle Investment Insured (Less Risk)
One of the major advantage to an index annuity is simply a reduction in risk. Your principle is guaranteed by your annuity provider, and in many cases a rate of return, regardless of market performance.
Riders on Indexed Annuities (Especially Income for Life Rider)
Riders are an additional benefit available to those who have purchased indexed annuities. A rider can be added on to your annuity at minimal cost. They’re great for those who want to maximize their income during retirement.
Using these riders to determine a certain level of income is a great technique for people who are trying to achieve a certain level of income for life, specifically retirees planning for a long-term retirement income. Riders have become one of the most popular aspects of indexed annuities.
Annuity providers are able to manage risk by large pools of annuity holders. Its not good for you or the annuity company if money comes and goes on a regular bases.
Because of this, many annuities provide for as much as 10% free withdrawals each year, but a surrender charge would be imposed on anything above that.
This assures that the annuity company fulfill its obligations without the risk of having too much liquidity.
Annuities have a ‘surrender period from five, ten, and even fifteen years depending on the promised benefits.
As a result, annuities are not a good investment for short term needs.
Annuities are highly regulated. Each State has its own insurance department determining which annuities will be offered in their State.
Each indexed annuity contains slight variations, so you’ll want to ensure someone fully explains the terms and conditions of your annuity.
You’ll want to know the how long the surrender charge period lasts, participation rates, indexes, income guarantees, and minimum rate guarantees.
Knowing the company and its financial strength is important as well.
Indexed annuity providers do not charge you to invest your money. Nor do advisors charge a upfront fee or an annual management fee.
The annuity company pays a commission to the advisor that does not come out of your investment. 100% of what you invest goes to work for you.
This can be a benefit as with many money managers either an upfront or annual fee is deducted from your account
Over the long-term commissions paid are comparable to those who charge fees, but it’s paid by the company, not you.
Commission vary based on the guarantees, length of the surrender charges, and so forth. Feel free to discuss this with your advisor.
Are Indexed Annuities Right for Me?
If you’re considering purchasing indexed annuities you may be wondering if it is the best investment choice possible. This type of financial product is a great addition to almost any portfolio if the instrument is understood correctly. If you think you will need access to all of your capital in a lump sum in the next 5-10 years, an indexed annuity may not be suitable for you.
If you’re looking for a guaranteed income for life, participating with market growth, without exposing yourself to market losses, and protecting your next egg, then an indexed annuity might be a good choice.
Finally, an indexed annuity is a conservative investment product that minimizes risk and provides long-term income.
Indexed annuities can bring peace of mind to an ever-increasing volatile market, if it fits your situation.
Become educated on the various types of indexed annuities and the benefits they offer.
Annuities must always be purchased through a financial advisor. However, not just any advisor will do.
You want a professional who has access to all the different choices out there and is experienced in matching up the best annuity for a particular situation.