Everyday on the World Wide Web there are articles telling potential annuity buyers why fixed index annuities are not right for them, but that they should look at purchasing stocks, bonds, or mutual funds instead because of their potential returns.
A fixed index annuity is an insurance contract, not an investment. Annuities are financial vehicles that offer tax deferral, a variety of income options, and a death benefit. Stocks, bonds, and mutual funds are investments. Indexed annuities should be judged on the merits of the unique features they offer:
- Locked-in interest: A fixed index annuity’s indexed interest is locked in each year by a feature called annual reset and can never be lost due to a market downturn. In other words, any indexed interest the owner earns is protected and is not just a number on a statement.
- Timing: Whether or not a person knows exactly when they’ll retire, no one can predict how the markets will be performing at that time. For example, the S&P 500 index was negative four times over the past 10 years. What if you decided to retire during one of those negative years? As stated above, with a fixed index annuity, the accumulation value will never decrease due to market volatility. This means when a annuity owners choose to start taking income from the contract, there is a 0% chance the they will have lost any earned interest due to changes in the market.
- Lifetime income: Annuities can do one thing no other retirement planning vehicle can do: provide guaranteed lifetime income. Regardless of what strategy or formula is being used, an annuity is the only retirement vehicle that will guarantee annuity owners will never outlive their retirement savings.
Like any other financial product, there are terms and conditions usually associated with annuity contracts. An owner will generally have to keep the premium deferred for a specified period of time before receiving income payments to avoid the assessments of penalties, such as surrender charges. Depending on the annuity selected these could be as short as 4 years.
