In “Understand fixed-indexed annuities,” James L. Watt of The Coloradoan explains that while fixed indexed annuities are complex products, they can offer you unparalleled market protection. That author notes that money market funds, 5-year CD’s, and both 5- and 10-year U.S. Treasury notes are not even offering returns that can maintain your buying power when they are up. Fixed Index annuities are a kind of combination of fixed and variable annuities, offering the best benefits of both products. They guarantee a minimum interest rate no matter what happens in the markets, but also link with a specific market index in the hopes that you’ll receive an even greater interest rate if markets increase. While the return is less than that for bonds and less than stock potential, you are also guaranteed to get your principal back because it is protected.
Your fixed indexed annuity return is typically based on three factors. The participation rate is the percentage of any gain that you will get, the best are around 90%. There also may be a spread or asset fee that reduces your percentage. If your spread were 3.5, you would get a 6.5% gain with a 10% market gain. There are also interest rate caps with most fixed indexed annuities. In 2009, the S&P 500 Index increased by 23.5%, but if your cap was anything like the norm of 7-10%, you would have received the 7-10% interest of your cap. But if you take into account the stock market performance from 2000 to 2009, the S&P 500 decreased by 24%. This caused huge losses in stocks and many other investments; compare annuities and most lost nothing. If you had a fixed indexed annuity with a 3% guaranteed interest rate and 90% participation rate which is likely, you would have seen a 2.7% gain while everyone else was losing. In order to receive the guarantees of fixed indexed annuities, you sacrifice huge gains for smaller ones but don’t have to worry about any losses.
Written by Rachel Summit
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