FAQs About Fixed Indexed Annuities Part 2
In this series, Annuity Alliance will provide some answers to some commonly asked questions about fixed indexed annuities. These excerpts are provided from the Indexed Annuity Leadership Council (IALC). This article is Part 2 in our series discussing the FAQs.
Is an FIA right for me?
Before determining if an FIA is right for your portfolio, make sure you understand the specific product features, and if the benefits align with your goals.
An FIA may be right for you if you…
- have a retirement plan in place, but want to reduce the risk in your portfolio
- want a steady stream of retirement income during retirement
- want growth potential, coupled with principal protection from market loss
- seek a guaranteed minimum rate of return that never varies, regardless of market swings
An FIA may not be right for you if you…
- are very comfortable with risk and fluctuations in your portfolio balance
- have already incorporated into your portfolio other financial products that protect against market volatility
- anticipate you may need to cash in your annuity before the full term of the contract or before you reach retirement age
Some websites warn me against FIAs – why?
Not all annuities are created equally – and not all information about annuities is complete or factual. It is best to get your information from reputable sources. Always work with a licensed professional to review your financial needs to see if a FIA is right for you. FIAs are safe to purchase as long as you are comfortable with the structure of the product. Because market risk is absorbed by the insurance company, the only way to lose your principal balance is to withdraw the full amount of your annuity before the contract ends.
Can I make an early withdrawal if I need to? (1)
Yes, you can make a partial withdrawal from your FIA as needed before the contract concludes. Most annuities have a penalty free withdrawal amount, although the exact percentage allowed varies based on the provider. Many annuities have various liquidity features. Be sure to understand these options before purchasing an annuity. While partial withdrawals within the allowed limits are not subject to surrender charges, the IRS may charge a 10% tax if these withdrawals occur before age 59 1/2. A full cash out from the FIA before the contract is complete, however, will result in a surrender charge from the insurance company as well as an
(1) The Coronavirus Aid, Relief and Economic Security Act, or the CARES Act, waives the annual Required Minimum Distributions on certain tax-qualified annuities and retirement accounts for calendar year 2020 and may impact withdrawals for FIAs. Speak with your Annuity Alliance financial professional for the latest.
What happens when I die? Can my spouse continue to collect income?
As with other insurance policies, you are able to designate a beneficiary(ies) to your FIA contract. The balance of your FIA contract will be distributed to your beneficiary(ies) in accordance with the terms of your specific contract and IRS guidelines.
What about inflation?
Although FIAs guarantee lifetime income, inflation has the power to diminish the purchasing power of that income. It is therefore recommended that purchasers work with a financial professional who can help them understand their target income for retirement, and how to build a balanced portfolio with enough growth potential to account for inflation.
I read about performance caps. What does that mean?
FIAs typically include a cap on the amount an FIA will credit in a given year. In some other cases, FIAs do not have a cap, but in these instances, the insurance company may reduce the interest credited by a fixed percentage of the annual returns.
Should I purchase directly from an insurance company or go through a financial professional?
Working with a financial professional who is licensed to sell FIAs is advised. This person will be able to help you determine your risk appetite and identify the FIA that best fits your individual needs.
If I want to learn more or purchase an FIA, where do I begin?
Individuals interested in learning more or purchasing an FIA should speak first to a financial professional. If you do not have a financial professional, Annuity Alliance can connected you with one.
About the IALC
Established in 2011, the Indexed Annuity Leadership Council (IALC) is a consortium of life insurance companies that offer fixed indexed annuities (FIAs). The IALC’s mission is to help educate the public, including retirement savers, the media, regulators, and financial professionals about the benefits of FIAs. These products offer principal protection from market loss, a predictable, guaranteed retirement income, and can contribute balance to retirement savers’ long-term financial plans. You can visit their website at fiainsights.org.