
Other Annuities
How a Fixed Indexed Annuity Really Works
Fixed indexed annuities are complicated products that don’t do everything they promise. Here’s what a fixed indexed annuity looks like in real life.
In short, a FIA doesn’t do it all. A fixed indexed annuity (or FIA) is an insurance product which produces a pension-like guaranteed income in retirement while also offering some liquidity and the opportunity to benefit from market growth. This product sounds like the best of both worlds — an income which doesn’t stop and the ability for that money to grow, as it would in the market. But, the insurance companies and brokers sell them for very high fees with lots of caveats, which significantly reduce the value that you could receive from your retirement savings.
Because they’re pitched as the ultimate financial products, we want to take you through each feature they offer, and how the insurance companies make it possible.
When you purchase a FIA, your premium is invested in different funds which track real or imagined market-based indices. How much your money grows depends on which indexes you choose. But, the returns you gain from the investments are severely limited by features like participation rates, caps, and spreads.
Most FIAs use most, if not all, of these features. Meaning your cap, spread, and then participation rate on top of that severely limits how much you benefit from the market growth aspect.
FIAs promise you won’t lose money. However, if you have any extra features (like turning the final accumulation into a guaranteed income), you’re still charged the management fee, regardless of the market’s performance.
FIAs have the option of turning your money into a guaranteed income in retirement. The payments are determined by multiplying a payout percentage (which is fixed when you start the policy) by the guaranteed benefit amount. There are a few factors to keep in mind:
With an income annuity, your money is generally illiquid. This is a turnoff to some potential buyers. FIAs try to address it by providing access to that balance, but it comes with caveats.
In this example, we’ll show you why it’s better to keep your guaranteed income and market investments separate – lower cost, higher income, and less complicated!
Fixed indexed annuities are complicated products that don’t do everything they promise. Here’s what a fixed indexed annuity looks like in real life.
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