Article Taken From Valley Financial Blog
Posted by Michael Reimann
Relatively new in the world of annuities are fixed index annuities. Similar to most insurance products in the market, each annuity will vary depending on the company and/or the specific fixed index annuity itself. However, there are constants with fixed index annuities that I will discuss below which will help you understand the terminology associated with fixed index annuities.
A fixed index annuity is a contract between you and an insurance company. You can make either a lump sum payment or a series of payments during the accumulation period. There are various options that can be chosen to determine how the insurance company will credit you. As stated before, these vary greatly depending on the company, so for the sake of keeping it simple I will discuss the two overall methods. As the name implies there is a fixed method and an index method. The fixed credits you a guaranteed rate and the index method credits you according to the performance of an index account, which is quite often based on the S&P 500, however there are some that use a mixture of the S&P 500 and other global indexes. The allotment in each account is something that you and your professional should discuss, depending on your objectives.
Fixed index annuities can be complicated products that often contain several features that may affect your return. You should ask your financial professional about the different features and how they are dictated in the fixed index annuity you may be considering. The following are some of the common contract features in a fixed index annuity that you want to consult with your professional:
- Participation Rates: The participation rate determines how much of the index’s increase will be used to calculate the index-linked interest rate. For example, if the participation rate is 90% and the index increases 9%, the return credited to your annuity would be 8.1% (9% x 90% = 8.1%).
- Interest Rate Caps: Some fixed index annuities set a maximum rate of interest that the annuity can earn. If the contract has an upper limit, or cap, of 10% and the index linked to the annuity gained 10.2%, only 10% would be credited to the annuity.
- Asset Fee: The index linked interest for some annuities is determined by subtracting a percentage from any gain in the index. This fee is sometimes called the “margin,” “spread,” or “administrative fee.” In the case of an annuity with a “fee” of 3%, if the index gained 9%, the return credited to the annuity would be 6% (9% - 3% = 6%).
Fixed index annuities are a great way to plan for future financial security for someone who is a little more on the conservative side, allowing for the option to move even more conservative as timing or personal preference requires. Again, keep in mind, annuities vary greatly depending on company and the actual annuity itself. The above bullet points are a few of the factors that affect fixed index annuities and for more personal goal related specifics please contact me, Michael Reimann at 480-214-9897 or mreimann@valleyfin.com.