Investments That Earn Interest
A fixed-indexed annuity gives you the opportunity to earn interest at an interest rate that is determined according to a formula based on the change of a referenced index. The rate is not guaranteed like a fixed annuity. Some of the credit you get (the interest rate) is determined partially by investment-based index reference, such as a Standard & Poor’s 500® index or the NASDAQ index.
Participate In Gains: The Rising Financial Market
As interest is credited, the earnings are locked into the account value. Additionally, the account will not participate in any losses the index may reach. An index annuity offers the ability to participate in some gains associated with a rising financial market while at the same time providing the security and guarantees similar to those associated with traditional fixed annuities.
As you consider a fixed-indexed annuity, acknowledge the following:
- Regardless of index performance, you won’t lose money unless you withdraw money or surrender your annuity during the early withdrawal period.
- Interest is credited to your annuity at the end of each one-year term.
- Fixed-indexed annuities can be flexible or single premium.
- Many fixed-indexed annuities offer riders that can provide guaranteed income for life or additional death benefit options for your beneficiaries. Extra annual charges apply for these riders
- Index-based interest up to the initial rate cap (called a cap rate). This is the most you can earn every year.
- Renewal cap rates are assigned every year.
For example, let’s assume you have a 5% cap:
- If the “index” is up 12%, you get 5%.
- How about an “index” that is up 3%? You take 3% credited to your account.
- You have an “index” that is DOWN -20% you would take a 0, nothing would happen to your account value.
- Always include a minimum cap rate- make sure you confirm what this is, it could 1% it could be 3% it could be .25%.
An adviser will get you the “published renewal rates” of past contracts with that insurance carrier. This is a great guild in determining credibility. Some carriers would not give this information out. If you bought the product in 2013 and purchased a 5% cap, for example, did the insurance carrier drop the rate to 4% the second year or keep it at 5%. How about 2015 and 2016? These are reasonable questions to ask. If you want us to pull this information for you because you have an advisor, we are more then happy to help you.
