An insurance product with an investment element
Tony Robbins’ 2014 book Money: Master the Game sparked increasing consumer interest in fixed indexed annuities (FIAs). Sales of FIAs in the U.S. were a record $53 billion in 2015, 13 percent above 2014 sales, according to Wink’s Sales & Market Report. FIAs have also attracted the attention of brokers looking to expand their solutions beyond stocks, bonds and funds.
Here are some top reasons people are making FIAs part of their portfolios and retirement plans:
- Transforming savings into income. When you purchase an annuity, you are exchanging a lump sum for an agreed upon income stream. Fixed annuities are appealing to retirees because they transform savings into a predictable income.
- Growth potential. While FIAs don’t directly invest in the stock market, they offer potential account growth based on the performance of a specified index, such as the S&P 500®. If the index has a positive return, the FIA policy is credited with interest.
- Principal-protected safety. Many people lost a significant portion of their retirement savings in 2008 as a result of stock market volatility. Because FIAs don’t directly participate in any stock or equity investment, they will not lose value if there is a negative market return. So those with FIAs experienced no losses due to market downturns.
- Track records. FIAs are backed by the strength of the insurance company offering them. Some of these insurance companies have been in business more than 150 years.
- Income guarantee. Annuities are designed to pay you a monthly income either immediately or in the future (called a deferred annuity). There are also policy riders that offer lifetime income, as well as the option of adding your spouse. Since the average 65-year-old couple today has a 52% chance of having at least one spouse live to 95, based on the Annuity 2012 Generational Mortality Table, FIAs with guaranteed lifetime income riders are attractive to retirees who do not want to outlive their savings.
- Tax-deferred growth. FIAs offer 100% tax-deferred growth. You’re not taxed on interest earnings while your money stays in the annuity. Once you start receiving payouts, just like a 401(k) or traditional IRA, they are taxed as ordinary income based on your income tax rate at the time. Similarly, if payments begin before age 59 1/2, an additional 10% federal tax may apply. You can also hold FIAs in non-qualified accounts with similar tax benefits, and with no penalties or mandatory distributions based on age.
- Bond replacement. Many investment advisors believe FIAs closely approximate bonds and other fixed-rate products, such as savings accounts or CDs. Historically-low interest rates on those accounts are contributing to the popularity of FIAs, as are their potential for greater growth and compound interest based on market performance, while avoiding exposure to market risk.
- More options. Annuity policies continue to evolve. There are FIAs offering inflation protection or coverage for long-term care. Insurance companies provide varying coverage as they enhance their policies and riders to meet consumer demand.
- Predictable income makes retirees happier. According to a Towers Watson Retirement Survey, having predictable retirement income makes retirees happier than withdrawing money from investments like 401(k)s or IRAs to pay for retirement expenses, which can cause anxiety.
If you think you or someone you know could benefit from fixed indexed annuities, contact us for a list of the top financial advisors in your area.