Guide to the best fixed index annuity

If you are looking to save money for after retirement, fixed index annuity is the answer. It is rather a conservative way of investment, but it keeps your safe from market volatility and takes the risk-off your table. Like any other annuity, index annuity is a contract between the user and the insurance company, where the user is guaranteed a sort of payment after retirement. It can be called as a hybrid between variable annuity and fixed annuity.

Reasons to consider Fixed Index Annuity

A fixed index annuity is a good way to earn indexed interest without risking losing your money to the changes in the market. Some of the reasons why people consider an index annuity is:

  • Your money is not buying any shares, so it is not at risk.
  • Money that is earned by the fixed annuity is tax-deferred.
  • Thanks to fixed index annuity, your next of kin are paid a certain amount after your death.
  • Fixed annuity ensures a reliable stream of income after retirement.
  • It provides a way to earn an external index.
  • It has a number of flexible options when it comes to receiving income.
  • A fixed annuity has higher interest rates as compared to others.
  • Even if you decide to retire early, you don’t get any penalty.

Fixed index annuity buying guide

Fixed index annuities can be pretty difficult and daunting to understand especially for a layman. It is something you will get a hang of with time and experience, hence the first thing you need to do, before buying index annuity, is get yourself a financial advisor. However, despite having an advisor, some of the most common terms associated with index annuity that you should know are:

Caps

These are a way to ensure that you are protected against loses. It is an upper limit that is put on the return for a certain period of time. Hence if the returned index is 5 percent but your index annuity has a 3 percent cap you will only receive 3 percent.

Participation rate

The participation rate decides the value of index increase the user receives. If you buy an annuity with higher participation rate, you will get a higher index performance. This is basically the percentage of index rate that the insurance company credits to the annuity.

Spread/Margin/Asset Fee

These three are one and the same thing. They refer to the fee that is subtracted from the gain in the index annuity. If a total of 15 percent index is gained and the asset fee is 5 percent, then the gain credited to the annuity will be 10 percent.

Surrender charges

You need to be beware of surrender chargers. Usually, users don’t notice these small details and are caught up in a whirlpool. The insurance companies specify a certain period of time and if the user withdraws the amount before the ending of that time period, he/she loses the value and return that is promised on the investment. Different companies provide different contract lengths. Sometimes there are hidden surrender charges that make you lose value for the investment even after the time period is over, hence, go through contract thoroughly with your financial advisor.