We all struggle with security/insecurity . Personally, I worry about what others think of me. Did I say something wrong? Why am I “weird”? What does “quirky” mean? Is “quirky” a good thing? (Okay, I might have just revealed a little too much;-) )
I worry about where I will be in 1 year, or 5 years, or 10 years.
I worry constantly about these trivial things, of which we have very little control over.
I say this, and yet I still worry!
But we can prepare. We can plan for the future. We can plan for our financial security. We can hope, but we can also take steps towards our hopes and dreams coming true
We can take the appropriate steps to help us with the fear of our monetary future
With retirement planning, it is not necessarily “predictable”. However, it is much easier to plan for the curve balls that life might throw at you.
Will I enough to live on? When will my money run out? What impact will it have if the stock market crashes Who will take care of me when I grow old? What if I end up in a nursing home, how much will that cost because I want to leave my kids something?
Well, the former I can’t help you but the latter, I might be able to! You can plan for the unexpected. Develop the financial security you need during retirement. I can help table the worries of the market’s up and downs during your retirement years, while still providing stable income that is not effected by market downturns, and, yet, you can still reap the market upticks with increased income.
How can this be accomplished this?
Indexed annuity returns are based on an index like the S&P 500. If the value of the index goes up, you receive a return based on that value. If the value of the index goes down, you typically receive a guaranteed minimum interest rate. The upside is limited, but the gains are permanently locked in on the contract anniversary date. That’s the value proposition for indexed annuities. Your money is guaranteed not to decrease.
There is only ways to receive guaranteed lifetime income: 1) Social Security; 2) Pension Plans; and, 3) Annuities with guaranteed lifetime income riders
You can add an income rider to an indexed annuity for future income guarantees. In fact, this often is the best way to use indexed annuities. Don’t even look at the accumulation part (i.e., interest) of the policy in most cases. Focus on the income guarantees in your income rider. The reasoning is that you should always own annuities for what they will do for you, rather than what they might do. Contractual guarantees deliver.
The bottom line is that indexed annuities are not too good to be true, but they can be pretty good if you keep your expectations in line with the contractual realities.
But how does insurance company make money on an index annuity when there is no fee?
Have you ever wondered how an insurance company makes money through the sale of annuities? Simply put, an insurance company makes money on the spread between its investment yield and the interest it credits to contract owners. But there’s more to it than you realize.
For traditional fixed annuities, 100% of the money the company receives from a contract owner is invested in traditional investments like corporate bonds, mortgage backed securities and similar securities. The largest portion of the investment yield generated is credited to the contract owner. The remainder covers acquisition and maintenance expenses, provides a profit for the risks undertaken, and produces a reasonable return on capital for the insurance company.
A Closer look at Index annuities
Preface: I will try to not get too much in the weeds with convoluted information you don’t need to grasp nor want to know!
To provide for market-linked growth and principal protection,
the insurance company uses approximately 3% of the contract owner’s premium to purchase a call option in a highly competitive bidding process among approximately a dozen investment banks. The best call option price is the one that gives the contract owner the highest cap for the fee the insurance company pays…. The Risk falls on the company, not you!
When the market rises…
The insurance company passes 100% of the return generated from the expiring 5.50% call option to the contract owner. For example, if the market rises 10%, the investment bank pays the insurance company a 5.50% return, and the entire amount is passed to the contract owner. The insurance company does not deduct any fees for the cost of the option, nor the competitive bidding process.
When the market declines…
The call option expires worthless, so there is nothing to pass along to the contract owner. The insurance company still absorbs 100% of the cost of the option.
The process happens at the start of each one-year term for the contract, where investment banks competitively bid again and the highest cap wins.