What Is A Fixed Index Annuity?
A fixed index annuity offers the opportunity for tax-deferred growth based in part on changes in a market index, plus the option to convert your annuity into a steady, guaranteed, lifetime income stream, all while protecting your hard-earned principal from the uncertainty of market volatility. Because there is a guaranteed interest rate floor, a fixed index annuity offers significant protection of your principal.
Generally, fixed indexed annuities have an interest rate floor, which is the minimum interest that will be credited each period – typically 0%.
A fixed index annuity’s growth is determined by the participation rate, which is the percent of an index that will be used to calculate interest crediting, and/ or a cap, which is the maximum interest that will be credited. Together, the interest rate floor, participation rate, and cap determine the amount of interest you earn.
Your interest earnings rate will always remain somewhere between the floor and the cap. It will not rise above the cap, even if the index goes higher. Conversely, it will never fall below zero, even if the index declines in value. In fact, the value of your money will never decline due to market loss for as long as it is in the annuity, although it can increase with a rising index.
When Is A Fixed Index Annuity Appropriate To Use?
Fixed index annuities are appropriate to use when you want both the stability and security of a fixed annuity and the ability to participate in market growth without the risk that is present in a variable annuity. Because you cannot lose principal in a fixed index annuity, many people find this is the best of both worlds.
In almost all cases (there are always exceptions), a fixed index annuity is great choice for people who want an annuity for secure retirement income. Unlike a standard fixed annuity that offers a set interest rate and principal guarantee, fixed index annuities offer the ability grow your savings, tax deferred which can potentially result in larger monthly income payments.
Annuities are a crucial part of retirement income planning as they offer the “Floor” to your income in retirement. One popular retirement planning approach for retirees is to identify the minimum essential expenses in retirement, those expenses that must be met, and insure they are covered for life with an annuity.
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