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The fixed index annuity is a plan that is becoming more popular every day. The simple reason is you are able to get protection on your principal investment, but also have the opportunity to receive a higher interest rate under certain circumstances.
Fixed Index Annuity Summary
A fixed index annuity is attached to a specific market index such as the S&P 500 or the Dow Industrials. The annuity provider offers you a low interest rate to protect against a market collapse or downturn, but also will give you a much higher return on investment if the index you are invested in rises. In other words, you could never possibly lose money regardless of what the market does, but you can have unlimited gains if the index you are invested in rises.
Fixed Index Annuity Pros and Cons
First we’ll go over the reasons why someone would want to invest in a fixed index annuity. The first is you have absolute protection against losing money and the potential to earn a lot more than just a regular interest based annuity. If the market crashes, you will still see a modest return. If the market skyrockets, you will see a massive return. The second advantage to this type of annuity is over the course of many years, you would usually expect the various markets to outperform any reasonable interest rate offered by an annuity provider. Therefore, you will see less return on investment some years, over the course of the products life you should come out ahead in most circumstances.
To summarize the pros, you cannot lose money and you have the opportunity to earn more than any other type of no-risk annuity.
Unfortunately, the fixed index annuities are not all gravy. There are some cons that should be carefully considered before investing in this or any other investment product. The first and really only con is fees. The annuity provider is in a tricky spot. If the S&P drops like a rock, the provider loses a fortune because they still have to pay you a positive return. As you can imagine, the annuity providers hedge against this using fees.
Participation Fees: The annuity provider will charge you fees for simply having the account. These fees are most always covered by your own return, but you have to be certain you understand exactly how much money you are spending for the privilege of having the provider hold your money.
Caps: Some annuity companies will cap your maximum return in any given year. They do this so they can keep the excess as a hedge against future bad years. As a rule of thumb, I generally recommend that people do not accept caps. If you had to guess if the annuity company would hedge their risk in your favor or theirs, which way do you think it is most likely to go?
Admin Fees: The admin fees are pretty standard and usually run around 1% per year. If your fixed index annuity provider is trying to charge you more due to the fact that it is an index annuity, look elsewhere.
As you can see the fixed index annuity is a great choice if you understand what you are purchasing and feel the markets will sooner or later always go up.
