A lot of confusion and hype floats around about Fixed Indexed Annuities (FIAs). A lot of financial advisors have given the term “annuity” a bad name. The word annuity implies “insurance” and, to me , therefore should not be tied directly to the market, ie “Variable Annuities”. With Variable Annuities you have annual fees plus substantial withdrawal fees if money in excess of the 10% penalty free amount is withdrawn. On top of all those charges, you can still lose your basis (or principal). With a FIA, there are no fees, only surrender charges if money is withdrawn in excess of the 10% penalty free withdraw amount. With FIA, the company is buying futures in the market, they are not buying actual stocks or mutual funds. This allows the insured to ensure his basis (or principal) is protected from downside risk while still being able to participate or reap the markets “up-swings”.
A 69 year old male client has $100,000 from a qualified retirement plan that they want protected from any downside risk. The client will soon have to start taking “Required Minimum Distributions” (RMDs) at age 70 1/2
If he puts directly into the market, he will have to take money out to satisfy RMDs regardless of market return. Therefore if the market falls 30% one year, he will have to pull money out of down market, thereby substantially lower his gains.
If he puts the money into a FIA, the company buys futures in the market with that money, pooled with several million others. The carrier charges a .9% spread (I’ll explain later). The carrier invests the futures into the S&P 500. If the client’s purchase date was 12/10/2018 and at his anniversary date the S&P 500 has gained 17%, the carrier will credit the clients account 16.1% (17% realized gain- .9% spread). If the market crashes 10%, the clients basis is protected , and he loses nothing.
When someone is forced to pull money out of qualified retirement accounts, the FIA makes great sense. If a FIA has an income rider of 5.5%, they get 5.5% of the base for life no matter what the market is returning…. AND this will satisfy their required minimum distributions
Here are a few questions to ask yourself:
- have a retirement plan in place, but want to add balance to the mix
- need your earnings to never fall below zero
- want growth potential, coupled with principal protection from market loss
- seek a guaranteed minimum rate of return that never varies, regardless of market swing
- seek an annuity where the insurance company assumes the risk
…then an FIA might be right for you.
A financial professional with Laurel Insurance Partners is a great resource to help you decide if you should add a FIA to your portfolio. Give us a call today to find out how we can help you.
Beau Singletary, ChFC, CLU
Toll Free: (855) 664-5660
Office: (828) 513-5045
Fax: (828) 348-5526