Chamberlin Financial


Indexed Annuity Insights

Fixed Indexed Annuities (FIA’s) have become very popular lately in retirement planning and for good reason. This type of annuity offers many features that other investment vehicles just don’t have. They offer safety of principal, income for life, tax deferred growth, and in some cases an upfront bonus. Sounds too good to be true one might ask depending on one’s objective.

With so many insurance companies offering these types of annuities it can be overwhelming trying to digest all of the different features an FIA offers. So let’s break down the basics on how this type of annuity works by first defining what it is and what it is not. An FIA is NOT a security like a variable annuity is. It is an insurance contract though it is linked to the performance of an index usually the S&P 500 but is not actually invested in the index.

The insurance company is paying the contract owner a percentage of what the index does at the end of an anniversary date subject to the cap rates outlined in the contract. So as an example if you put 100k into an FIA that offered an 8% premium bonus upfront (true bonus) then your contract would be valued at $108,000.00 from day one.

A year from the anniversary date the insurance company looks back at the performance of the index and the index strategies selected for the contract subject to the cap rates. So if the annual cap rate was 5% and the index gained 8% then the contract would lock in the 5%. Once it goes up it can go down after it’s locked in. So for the protection on the downside they limit how much you can gain on the upside. There are also monthly strategies that could have a much better outcome for the contract owner in a year where the index gained a lot.

Now what we just discussed is the contract value and how it can move up when the underlying index moves up. The contract value is the true value and it is also the death benefit that bypasses probate and goes directly to the beneficiary. There are also income riders that you can attach to the contract creating an income account value.

The income account value is just a value used by the insurance company to calculate the contract owner’s payout based on their age. So for example if you put $100,00.00 into an FIA that offered a true 8% bonus and attached an income rider paying 6% compounded interest then your contract value and your income account value would start at the same value of $108,000.00.

Your contract value after the first year only moves up based on what the index does and any gains are locked in so once it goes up it can’t go down. Your income account value however grows at 6% in this case every year until you decide you want to turn on your income benefit. Again as an example let’s say in year 6 your contract value is $125,000.00 but your income account value is 145,000.00 then your income would be based on the $145,000.00.

There are pros and cons to every investment so you should work with an experienced adviser well versed in this subject. Not all FIA’s are the same and some are better than others depending on your objective. Real Benefits of Indexed Annuities with the Annual Reset Design