What is a fixed indexed annuity (FIA) again?

An FIA combines the low-risk elements of fixed annuities (you can’t lose your primary) with the potential capped returns of variable annuities (you can see substantial growth).

In other words, you have a lot of reward with little risk. (We love to hear those words in investments!) But do fixed indexed annuities simply sound too good to be true?

Here are the 5 things you need to know:

  1. FIAs are protected from the volatility of the stock markets. Your money is never actually in the stock market, so you don’t own securities that can fall. Insurance companies often set guaranteed minimum interest rates – they’re often “boosted” for your first year.
  2. You cannot outlive fixed indexed annuities. If you choose the lifetime payout, then no matter how long you live, your FIA will continue to pay you regularly.
  3. You have the safety of low risk because you also experience low growth. Less risk also means less immediate reward. If you’re looking for a high risk, high reward investment, FIAs are probably not the best option for you.
  4. There is still risk involved! For example, if the insurance company were to go out of business, its guarantees are worthless and you would lose your investment. This money is not insured by the FDIC.
  5. Early withdrawals can result in losing a portion of your premium. Exact percentages are determined by state laws, but many require paying back at least 87.5 percent of the premium at 1 to 3 percent interest. If you withdraw too early, you might consequently lose some of your premium, incur taxes, a surrender fee, or a 10% IRS penalty is you are younger than 59 1/2. Those fees do add up. Insurance companies are also notorious for increasing fees without notice or warning, so you may find there is less of your principal left than you had imagined. If you are looking for a strategic financial move to help you be better prepared for your retirement, let us help!