Annuities:
Indexed Interest Potential
You may be able to select the index that an FIA is linked to. In fact, you may be able to select multiple indexes. The terms of your FIA contract will tell you the details.
Fixed Index Annuity Rates
When you hear something is “fixed,” you might think it can’t change. However, fixed index annuities (FIAs) come with a lot of flexibility. For example, the interest rate. Unlike, say, a fixed annuity, which offers an interest rate that stays the same, an FIA’s rate may change over time, based on the performance of an external index. This is what’s called indexed interest potential.
An important distinction to make: an external index is not the same thing as buying stocks. An FIA, unlike stocks or mutual funds, is not an investment. It’s an insurance product.
And, unlike with stock market investments, the money in an FIA is not at risk in the event of a market downturn. Although when the index rises, you’ll earn interest, your principal can’t decrease if the index goes down. This promise of safety is one of the key benefits of an FIA.
The crediting method is another choice that you may have with a fixed index annuity. Insurance companies determine any potential index interest for their policy owners. They can do this via a number of methods.
The first method you may select is the annual “point-to-point” method. This method follows the fluctuations in the market from year to year, and credits the interest based on the annual change.
Next, there’s the “monthly sum” method. This method tracks the increases and decreases throughout each month and adds them up. Their total sum determines the index interest credited to your annuity.
Lastly, there’s the “monthly average” crediting method. This method entails adding up the individual index values of each month, and then dividing them by 12. In other words, calculating the average interest per month. That amount is then divided by the starting value to find the percentage of interest credited to your annuity.
Fixed Index Annuity Rates
And Protection Benefits
Keep in mind, a fixed index annuity (FIA) may help keep your money safe. This promise is backed by the claims-paying ability of the insurance company. So, even if your index or indexes drop, you do not incur loss of principal. In fact, by law, the insurance company must keep your money safe in a reserve. Many retirees choose an FIA for this benefit.
We say index interest potential, because sometimes you may see a credit. Other times, though, you may not.
In fact, it also depends upon participation rate, caps, and spreads. For example, you may have a “ceiling” on how much interest the insurance company may apply. However, you would also have a “floor.” At Lifelong Financial Solutions, we want you to know your options. Attend one of our events to learn more.
What Affects Potential Fixed Index Annuity Rates?
Remember, an FIA offers some benefits. One of these is protection of principal. Second, is reasonable rate of return**. Also, an FIA supports the idea of “keep it simple.” However, there are some details you should know. First, each annuity contract has different terms. The way you will receive any potential credit may differ. Usually, different annuity products have different choices. One type of annuity may offer benefits that another does not. Be sure to review these choices. Of course, each retirement situation is different. Therefore, reach out to us for an appointment. We can go over your questions. Also, we can review any current annuity policies you may have.
Sometimes, you may see new terms on your annuity contract. To help, here are some definitions:
CAP
Just like it sounds, a “cap” is the limit. If your annuity’s index goes over the cap, the insurance company pays you the cap rate.
Participation Rate
Percentage of the index interest only (not the whole index rate). For example, perhaps you get 50% of whatever growth happens. Or, you may get more or less.
Spread
Insurance company applies a certain percentage of the index interest. For instance, let’s say the rate is 10%. You have a 4% spread. This means a net 6% rate (for example purposes only.)
Find out more about these terms.
Reach out to our office or visit us at an upcoming event.
