How Annuities Work
HOW DO ANNUITIES WORK?
There are multiple types of annuities.
Of the different types, fixed indexed annuities (FIAs) come with unique benefits. An FIA has the most flexibility of any annuity product. Additionally, it can help you to reach your long-term retirement goals. FIAs also offer tax-deferral, indexed interest potential, and reasonable rates of return.** Furthermore, an FIA can provide an income for life. Depending on your individual policy, there could be further benefits.
One of the key benefits of an FIA is its level of protection. Both your principal amount and any interest credited to your account are protected while your money is growing. Then, when you begin collecting income, you won’t have to worry about outliving your money. Lastly, an FIA may be able to help protect the people you leave behind. If you pass away before annuity payments start, your beneficiaries could get that income instead.
How Fixed Indexed Annuities Work
So, how do these annuities work? FIAs have two stages, called accumulation and distribution.
Accumulation
During the accumulation stage, your money grows over time.
Distribution
Then, in the distribution stage, you can begin withdrawing money.
The issuing insurance company agrees to credit your contract with at least the minimum contracted interest.
Because your FIA is linked to an index, instead of directly invested in the market, your principal is not at risk. When the index is up, you get a reasonable rate of return.** You have indexed interest potential. However, when the index is down, you won’t lose money. Depending on the details of how your particular contract works, you may also choose a fixed interest rate.
Taxes and Death Benefit
Taxes are deferred on your annuity until the distribution stage begins and you begin taking money out. If you compound tax-deferred growth, it’s possible to increase overall savings. Additionally, tax deferral may increase the amount of income your FIA can get you. Although traditional IRAs and 401(k)s are also tax-deferred, these plans have limits on how much money you can put into them. Because it’s an insurance product, these limits don’t apply to an FIA.
Additionally, as the owner of an FIA, you’ll determine who you want your beneficiaries to be. This way, your loved ones won’t have to go through probate to access the death benefit.
Factors that Impact FIAs
You can typically choose the index or indexes your annuity is linked to. Additionally, there are more factors to consider when selecting an annuity product. These include caps, participation rates, spreads, the credit method choices.
Each of these factors impacts details such as:
How much interest you may receive
How the interest is calculated
When and how you receive the money
Other Benefits
Other optional benefits may further protect you and your money. For example, you may decide to protect your retirement income from inflation using an income rider. Furthermore, you may be looking to further protect your assets or your beneficiaries. Each person’s situation, goals, and needs are different. Reach out to us to learn more.
