Indexed Interest Potential
Understanding Annuities
Understanding annuities may be an important part of your retirement plan. The term FIA stands for “fixed indexed annuities.” Since the term “fixed” is in the name, you might think an annuity offers little flexibility. But, in fact, FIAs do have quite a few choices available. For example, you are able to choose the index which you’d like to link with your annuity. Again, this doesn’t mean you are choosing funds or stocks. However, FIA owners may select an external index. Interest grows with your FIA due to changes in the index of choice. Also, you may decide how much of your annuity value should link to a certain index.
Another choice buyers of FIAs have: crediting method. Basically, insurance companies design rules and timelines that guide how they calculate an index’s interest. With this data, they see how much credit, if any, is paid to your particular annuity. Some FIA owners choose a monthly instead of an annual crediting method, for instance.
Also, the crediting method of your annuity may use an average of its index value across time. Still, others may figure out interest rates by looking at the difference in index value from one specific point in time to another. Finally, you may have an FIA that uses an annuity contract date to indicate its index value. In other words, every year, on that same date, the value of the index is examined.
But First, Don't Lose
FIAs have many benefits, but the security of the money is a big one. Your money stays safe. Therefore, even if your FIA’s index(es) go down in value, your money does not. In fact, insurance companies have to keep your money safe because of their agreement with you. So, you may have potential gains when your FIA’s related index(es) are up. In addition, you’ll still have your money should the index drop. Typically, an FIA provides a reasonable rate of return (over time) when indexes are up. If the market turns down, you won’t lose. Knowing that you won’t outline your retirement is key for many retirees.
Potential Interest Rate: What Affects It
To figure out index interest, some annuities use a “spread.” This works by subtracting a certain percentage from the increase of the index. Usually, this calculation uses a set time period. For instance, if the annuity increases 9% and the spread is 4%, the annuity would get a 5% credit of interest.
There may be a maximum amount of interest your FIA may earn. Usually, a term of one month or year is what the insurance company uses for looking at how much the index increases. Basically, you’re either paid the index calculation interest or the cap rate, whichever is lower.
Essentially, this means you don’t get the entire amount that the index goes up. Instead, only a certain % of the value is used. In other words, it only takes part in some of the earnings.
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Understanding Annuities: Growth Potential?
If the rate of the FIA index is higher than a certain point, the earnings hit the FIA account. But, your annuity’s value doesn’t sink if its index happens to drop, either. In other words, rates of interest look at various factors including participation rate, cap, and spread. Every situation and each product is different. Therefore, the choices you make with your annuity may vary from someone else’s. When Marathon Group Financial meets with a new client, we go over all the index interest terms. We want to make sure you are understanding annuities and how they work. In addition, you can learn more by attending in-person (or, viewing online), one of our educational seminars. The decisions you make today affect your retirement. So, learn as much as you can to maximize your retirement success.
