A Simple Look at the Fixed Annuity

The fixed indexed annuity (FIA) is a unique product in our toolbox. It is a fixed annuity that earns interest and provides benefits that are linked to an external equity index. One of the most commonly used indices is the S&P 500.

An FIA is different from other fixed annuities because of the way it credits interest to the annuity’s account value. Some traditional fixed annuities credit interest based on a rate set at contract issue. There are other fixed annuities where the interest rate credited to the contract could be potentially reset annually. FIAs credit interest using a formula based on changes in the index to which the fixed annuity is linked. The formulas decide how the additional interest, if any, is calculated and credited.

FIAs offer many of the benefits retirees and pre-retirees are most interested in today: wealth preservation, growth potential, guaranteed income payments, premium flexibility, tax-deferred growth, and protection for beneficiaries. In essence, an FIA could be considered a “best of both worlds” product. On one hand, clients want the safety and guarantee of principal and credited interest. On the other hand, most people would probably prefer the potential of higher interest by being linked to the market — the return potential that a fixed-rate product cannot offer.

In the past, the choices were either (1) receive the guarantee of principal and a set amount of interest; or (2) link to the market with the potential of higher returns, but also accept the downside risk to the principal, which is the case with a variable annuity. An FIA offers guarantee of principal and the potential of market-linked growth with no risk of loss of principal due to market downturns.

Given the overall positives of this kind of product, why have many agents shied away from it in the past? Certainly, the negative publicity surrounding annuities in general and FIAs in particular have not helped. For years, many advisors considered the FIA as a high-commission product with no meaningful place in retirement planning. They simply didn’t sell FIAs because they believe the product to be complicated, costly and unfriendly to the consumer.

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