Fixed Index Annuity
Fixed index annuities are tax-deferred insurance products that provide market upside, while protecting principal from market losses. Assets are allocated into indices that are designed to replicate market performance. These fixed index annuity indices are typically accompanied with cap rates, spreads, or participation rates.
The Market for Fixed Index Annuities1
In 2021, fixed index annuity sales reached $63.7B, a 15% increase from 2020. Improved interest rates and product innovation around cap rates helped make these products more attractive to advisors and clients alike. Fixed index annuities remain a highly popular product for investors seeking market growth with complete principal protection and the ability to add guaranteed lifetime income through a rider. As more investors seek ways to combat inflation, fixed index annuities' popularity is projected to increase.
DPL's View: Fixed Index Annuities
These measures are created within the context of insurance products.
How Fixed Index Annuities Work
Accumulation: Investors can choose between a fixed account with an annual guaranteed rate of return, or index options designed to replicate market performance. While these indices are not the equivalent of investing in an index fund or ETF, they can offer greater performance than the fixed account with the same level of principal protection.
Income Generation: When ready to convert accumulated values into income, investors can utilize a rider or elect systematic withdrawals. Through use of optional living benefits, clients
can not only generate guaranteed lifetime income, but access other features like increasing lifetime income payments, health-activated income multipliers, and an exclusion ratio on payments for increased tax-efficiency.
Underlying Strategy: Investor premiums are used to purchase fixed income for yield and derivatives to hedge the portfolio. This combined investment allows the carrier to produce a return that mimics the returns of the index while providing principal protection for the client’s premium. Due to the investment durations required to deliver the product benefits, most fixed index annuities have surrender periods. This is similar to other investments that require a duration and may come with an early withdrawal or liquidity penalty.
Problems with Commissioned Fixed Index Annuities
How to Think About Commission-Free Fixed Index Annuities
One advantage of utilizing fixed index annuities is to leverage the scale of insurance carriers to deliver strong pricing in a packaged product, making it comparatively easy to implement, while also getting guaranteed downside market protection from the carrier.
Many fixed index annuities offer optional guaranteed lifetime income riders for an additional cost. While guaranteed income options from fixed index annuities are generally a bit lower than can be achieved through single premium immediate annuities (SPIAs), they generally have greater liquidity and flexibility.
When your client needs:
PRINCIPAL PROTECTION: With the principal protection from market risk, fixed index annuities should be considered for clients nearing or in retirement to help mitigate sequence of returns risk.
FIXED INCOME: Fixed index annuities can be used as a fixed income allocation for a portion of client portfolios. They provide sequence of returns protection for those entering or in retirement, with a higher rate of return than current bond yields..2
GUARANTEED LIFETIME INCOME: Through the use of a living benefit, fixed index annuities can be used to generate guaranteed lifetime income with allocation flexibility and liquidity (beyond the surrender period).3
2Whitepaper: Fixed Indexed Annuities: Consider the Alternative, Roger Ibbotson, (1/2018)
3FIAs may be subject to surrender charges, market value adjustment, and taxation for early withdrawals
Fixed index annuities are contracts purchased from a life insurance company that are designed for long-term retirement goals.
While the interest rate credited to an indexed account is linked to the performance of an underlying index, premium payments made to a fixed index annuity are never directly invested in the stock market.
All guarantees are based on the financial strength and claims-paying ability of the issuing insurance company.
The purchase of an annuity within a retirement plan that already provides tax deferral under sections of the Internal Revenue Code results in no additional tax benefits. An annuity should be used to fund a qualified plan based upon the annuity’s features other than tax deferral. All annuity features, risks, limitations, and costs should be considered prior to recommending the purchase of an annuity within a tax-qualified retirement plan.
Have more questions about our Fixed Index Annuity options?
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