Understanding Fixed Index Annuities

UNDERSTAND THE BENEFITS

A fixed index annuity (FIA) offers a unique combination of benefits that can help you achieve your long-term goals. No other product offers the tax deferral, indexed interest potential, and optional benefits to protect your retirement assets and income.

Let’s take a closer look at the three key benefits of fixed index annuities: tax deferral, indexed interest potential, and protection.

TAX DEFERRAL

Under current federal income tax law, any interest earned in your fixed index annuity contract is tax-deferred. You don’t have to pay ordinary income taxes on any taxable portion until you begin receiving money from your contract. Withdrawals are taxed as ordinary income and, if taken prior to age 59½, a 10% federal additional tax may apply.

INDEXED INTEREST POTENTIAL

Fixed index annuities provide an opportunity for potential interest growth based on changes in one or more indexes. Because of this potential indexed interest, FIAs provide potential for accumulation. And since the interest your contract earns is tax-deferred, it may accumulate assets faster. In addition to potential indexed interest, FIAs can offer you an option to receive fixed interest.

PROTECTION

Fixed index annuities offer you a level of protection you may find reassuring. That protection can benefit you in three separate ways:

Accumulation: Your principal and credited interest are protected.
Guaranteed Income: You can be protected from the possibility of outliving your assets.
Legacy: If you pass away before annuity payments begin, a fixed index annuity may help you provide for loved ones.

INDEXED INTEREST POTENTIAL

One advantage of a fixed index annuity is the opportunity to accumulate interest based on changes in an external index.

Some FIAs offer you a choice of indexes rather than just one. In addition to choosing your indexes, you can also determine what portion of your annuity’s value will be based on each index chosen.

Although an external market index or indexes may affect your contract values, the contract does not directly participate in any stock or equity or bond investments. You are not buying shares of any stock or index fund.

FIA’S INDEXED INTEREST POTENTIAL

When you purchase a fixed index annuity, you can allocate its value to one or more chosen indexes. A crediting method is then used (which will be defined later) to track the performance of your index(es). At the end of each contract year, the indexed interest is calculated.

If the result is positive, you will automatically receive indexed interest, subject to a participation rate and a cap or spread (which will also be defined later). That interest is locked in each year and cannot be lost due to index declines at some point in the future.

If the result is negative, nothing happens – and that can be good news! Although you won’t receive any indexed interest for the year, your annuity’s value doesn’t decline.

FACTORS THAT INFLUENCE HOW A FIA’S INDEXED INTEREST IS CALCULATED

When you purchase your fixed indexed annuity, you can often choose the index(es) to which you allocate your annuity’s value. You can also choose the crediting method used to track changes in your chosen index(es). Before discussing those crediting method choices, it’s good to look at some other factors that will affect how your indexed interest is calculated.

CAP:

Some fixed index annuities set a maximum rate of interest (or cap) that the contract can earn in a specified period (usually a month or year). If the chosen index increase exceeds the cap, the cap is used to calculate your interest.

PARTICIPATION RATE:

In some annuities, a participation rate determines how much of the index increase will be used to calculate your indexed interest. (Participation rates are generally applied after caps, and before a spread.)

SPREAD:

The indexed interest for some annuities is determined by subtracting a percentage from any gain the index achieves in a specified period. For example, if the annuity has a 4% spread and the index increases 10%, the contract is credited 6% indexed interest.

FIA CREDITING METHOD CHOICES

No single crediting method consistently delivers the most interest under all market conditions.

A quick definition of some popular crediting method choices is provided below. For a better understanding of how each crediting method works, talk to us and we are happy to provide you with additional information. Keep in mind that caps, participation rates, and spreads will also enter into the calculation of indexed interest, and may reduce the amount of interest credited.

Annual point-to-point. This method tracks changes in the market index from one contract anniversary to the next and credits interest based on that annual change.

Monthly sum. With this method, individual monthly increases and decreases in the index values are tracked and added up. Their sum helps determine the indexed interest credited to the annuity.

Monthly average. For this method, the individual monthly index values are totaled, and then divided by 12 to find the average. The starting index value is subtracted from the average to determine the amount of positive or negative index change. This amount is divided by the starting value to determine the percentage of interest credited to the annuity.

THE BENEFITS OF AUTOMATIC ANNUAL RESET

Annual reset is a common FIA feature. At the end of each contract year, your annuity’s index values are automatically reset. This means this year’s ending value becomes next year’s starting value. Annual reset also locks in any interest your contract earned during the year.

TAX DEFERRAL

A FIXED INDEX ANNUITY OFFERS TAX ADVANTAGES

During the accumulation phase of your contract, any interest growth is tax-deferred. If you purchase your fixed index annuity with after-tax dollars, you will only pay ordinary income taxes on your earnings – not on your premium payments – when you begin withdrawing money. Tax-deferred growth, compounded over time, may increase the amount of savings and income your fixed index annuity generates for your retirement.

Tax deferral is also a benefit of traditional IRAs and 401(k)s. However, annuities don’t have any government-imposed contribution limits. Because of that, they can often be a good choice if you want to save more than IRAs and 401(k)s allow and still enjoy tax-deferred growth potential.

Purchasing an annuity within a retirement plan that already provides tax deferral results in no additional tax benefit. So use an annuity to fund a qualified plan based upon features other than tax deferral, such as lifetime income options or the guaranteed death benefit.

Tax-deferred growth, which can compound over time, may increase the amount of savings and income your fixed index annuity generates for your retirement.

INSURANCE COMPANY

This is the company that issues the annuity. The insurance company is responsible for backing the annuity’s guarantees.

CONTRACT OWNER/ANNUITANT:

These usually are the same person, but they can be different. The owner makes decisions about the annuity, such as who the beneficiaries are. The annuitant is the person whose life expectancy is used to calculate annuity payments.

BENEFICIARY:

The beneficiary is the person who receives the annuity’s death benefit. Naming one or more beneficiaries is important, because without a beneficiary, the money in your annuity could be subject to probate.

A death benefit can be paid to your beneficiary without probate.

UNDERSTANDING THE BASICS

A fixed index annuity is a contract between you and an insurance company that may help you reach your long-term financial goals. In exchange for your premium payment, the insurance company provides you income, either starting immediately or at some time in the future.

HOW A FIXED INDEX ANNUITY WORKS

Most fixed index annuities have two phases. First, there’s an accumulation phase, during which you let your money earn interest. This is followed by a distribution or payout phase, during which you receive money from your annuity.

A fixed index annuity also guarantees you will receive at least the minimum guaranteed interest credited to the contract. Remember that all of these guarantees are backed by the claims-paying ability of the issuing company.

With a fixed index annuity, you defer paying taxes on your contract’s interest until you receive money from the contract. Tax-deferred interest means the money in your contract can grow faster.

Your principal and bonus are never subject to market index risk. A downturn in market index(es) cannot reduce your contract values.

PHASE ONE: ACCUMULATION

The accumulation phase begins as soon as you purchase your annuity. Your annuity can earn a fixed rate of interest that is guaranteed by the insurance company or an interest rate based on the growth of an external index.

PHASE TWO: DISTRIBUTION

The distribution phase of a fixed index annuity begins when you choose to receive income payments. You can always take income payments in the form of scheduled Annunciation payments over a period of time, including your lifetime. And many fixed index annuities allow you to take income withdrawals as an alternative to Annunciation & payments. Either way, you can choose from several different payout options based on your personal needs, including options for lifetime income, guaranteed.

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*Index or fixed annuities are not designed for short term investments and may be subject to caps, restrictions, fees and surrender charges as described in the annuity contract. Guarantees are backed by the financial strength and claims paying ability of the issuer.