9 Facts About Fixed Index Annuities

Calculating how much money you will need for retirement and understanding different products and their benefits is important for your financial wellbeing. Fixed index annuities are an option many Americans consider including in their retirement planning toolbox. We answer frequently asked questions to help better understand how fixed index annuities work.

What are fixed index annuities?

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Annuities are insurance products that can be important in your overall retirement portfolio. Fixed index annuities, also known as FIAs, are sold by licensed insurance professionals who can help you find the right approach to achieve your retirement goals.

Here are answers to some frequently asked questions to help you better understand these products.

1. Do I need a large amount of money to purchase an annuity?

Many annuity contracts can be purchased with as little as a $5,000 minimum. The minimum purchase amount varies by product and insurance company. If you are interested in purchasing a fixed index annuity, talk to your financial professional about how to achieve your financial goals.

2. Are annuities too complicated to understand?

Annuities are not as complicated as you may think. An annuity is simply a contract between you and an insurance company. In exchange for an initial, or in some cases, recurring payment, called a premium, the insurance company promises to make a series of payments to you either immediately (an immediate annuity), or at some point in the future (a deferred annuity).  

The value of deferred annuities grows during the accumulation period. After the accumulation period, regular payments are made to you during the payout period. How interest accumulates during the accumulation period differs depending on whether the annuity is a fixed, fixed index or variable annuity. 

Fixed index annuities offer growth potential without risk of loss due to market volatility. Plus, they offer a steady stream of income you cannot outlive. According to the Indexed Annuity Leadership Council, one in five Americans are familiar with FIAs and almost half of Americans understand FIAs can provide guaranteed lifetime income. 1^Indexed Annuity Leadership Council “How to Tell FIA Facts from FIA Fiction” [Video file] Retrieved from https://www.youtube.com/watch?v=XXfqGvG20t0&feature=youtu.be 2017

3. Do you have to be a certain age to purchase an annuity?

Some annuity products have certain age restrictions and some don’t. But, there is an important age to remember concerning annuities. Generally, and subject to certain exceptions, if you withdraw money from an annuity before you reach age 59½, you may have to pay an additional 10 percent tax on your funds. 2^2 26 U.S. Code § 72(q)

Many people purchase annuities closer to their retirement age to avoid incurring this financial cost. Consult a financial professional if you have questions about age requirements.

4. What is the difference between a fixed annuity and fixed index annuity?

In a traditional fixed annuity, interest accumulates based on a fixed interest rate guaranteed for a set period of time.

In a fixed index annuity, interest accumulates based on the performance of an external index, such as the S&P 500® Index. However, even if the index performs poorly, interest can never be lost once credited to the annuity contract.

5. Are there tax benefits to an FIA?

In most cases, fixed index annuities offer tax-deferred growth, which means taxes are not owed until a withdrawal is made. Ask your tax professional any questions about tax impact if you are interested in purchasing an FIA.  

6. Do fixed index annuities invest in the stock market?

Fixed index annuities are considered insurance products and are not directly tied to or invested in the stock market. While these products aren’t directly invested in the stock market, interest earned is based on an external equity or bond index. Interest credited will never be less than zero and can never be lost due to market volatility. 

Some common indexes used are S&P 500® Index and Dow Jones Industrial Average®(DJIA).

7. How can I access money within an annuity?

This depends on the type of annuity you have. Are you hoping to receive payments right away or still saving for the future? If you purchase an immediate annuity, you will begin receiving regular annuity payments within the first contract year.

If you purchase a deferred annuity, typically your annuity payments won’t begin until sometime after the first contract year. With a deferred annuity, you still typically have access to money at any time, but you may have to pay applicable surrender charges if you withdraw money within the surrender charge period. 

Some annuities allow you to withdraw a specified percentage each year without incurring a surrender charge. This penalty-free amount differs by product and by insurance company.

Again, if you withdraw funds from a deferred annuity before you reach age 59½, you may have to pay an additional tax on those funds. You should consult a tax professional for additional information on the tax consequences of withdrawing funds from an annuity at any age.

8. What is the difference between a fixed index annuity and a variable annuity?

Fixed index annuities are a type of fixed annuity that earns interest based on changes in a market index, which measures how the market or part of the market performs. The interest rate is guaranteed to never be less than zero, even if the market goes down.

Variable annuities earn investment returns based on the performance of the investment portfolios, known as “subaccounts,” where you choose to put your money. The return earned in a variable annuity isn’t guaranteed. The value of the subaccounts you choose could go up or down.  If they go up, you could make money, but if they go down, you could lose money.

9. How will I know what type of annuity works best for me?

Every retirement is different, and your goals for your golden years will be different than the person next to you.

When choosing the right product, you will have to consider when you want your payments to begin, risk factors, potential market volatility for certain products and tax requirements.

When researching annuities, it’s about how you want to secure a financially independent future in retirement with products designed to protect assets while allowing for growth opportunities and reliable income streams. It is important to remember annuities are backed by the insurer that issues the contract and are regulated by state law. 

There is a lot to consider when it comes to planning for your retirement. Talk to your financial professional about retirement planning solutions that meet your needs and the benefits that mean most to you.

 

Footnotes

American Equity does not offer variable annuity products. If you would like more information on variable annuities please review the consumer education provided by the National Association of Insurance Commissioners (NAIC).Opens a New Window.
Guarantees are based on the financial strength and claims paying ability of American Equity and are not guaranteed by any bank or insured by the FDIC.
The "S&P® and/or Dow Jones®" is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by American Equity Investment Life Insurance Company (“AEL”).  Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). These trademarks have been licensed to SPDJI and sublicensed for certain purposes by AEL. AEL's products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their respective affiliates, and such parties make no representations regarding the advisability of investing in such product(s) and have no liability for any errors, omissions, or interruptions of the S&P and/or Dow Jones. 
The content is provided for informational purposes only and does not constitute advice. For specific details on how this may apply to your personal situation, contact your personal financial advisor or insurance agent for more details. American Equity contracts are only sold through independent agents. Please contact your state insurance department to see if there is an independent insurance agent in your area appointed to sell American Equity annuity contracts. 
American Equity Investment Life Insurance Company® does not offer legal, investment, or tax advice. Please consult a qualified professional.