Money Matters Rick Hughes

With

Fixed Index Annuities can be confusing. For one thing, they are not fixed annuities, which have been around for a long time. FIAS, which came about in 1995, guarantees a set interest rate. Usually, the rate is fairly low, such as 2.5%, but guaranteed no matter what the economic conditions. The major question is whether FIAS are good for your portfolio.

An FIA is an insurance contract between you and the issuing insurance company. The insurance company is guaranteeing your principal and backing your principal payments with their assets. They make these guarantees based upon the claims-paying ability and financial strength of the issuing insurance company.

In an FIA, during the accumulation phase, your contact growth potential is linked to an index, such as the S&P 500, but not directly invested in the index. The insurance company has guaranteed that if the linked index is positive, you will receive interest credits to your account, but if the linked index is negative, your contract value will not be negatively impacted. Remember, you are not directly buying a stock—instead, your contact value is only linked to the index you have chosen.

Many insurance companies offer a bonus for your principal purchase. Let’s say you make a principal payment of $100,000 and receive a 10% bonus, which would increase your contract value to a theoretical value of $110,000. Why would an insurance company be willing to do that? It’s very simple, they have plans to make money from your money, in the same way, banks loan out your money for profit.

Driven by a passion to educate, inform and prepare future retirees, Mr. Hughes founded Hughes Retirement Group in 2007. His main interest is helping his clients in reducing their taxes.

Most FIAS have two phases, the first phase being your accumulation phase. This includes your principal payment(s) and bonus that you may have received, plus any credited interest rates you received as well. Most insurance companies will allow you to withdraw up to 10% a year without a surrender penalty. Be sure to review your specific insurance contract for certain conditions, exceptions, and limitations that may apply. The insurance company only allows you to take up to a 10% surrender penalty-free withdrawal. If you take more than 10%, a surrender penalty is assessed and you may lose any potential credited interest rate that could have occurred.

The second phase would be the distribution phase. Purchasers receive a percentage of income depending on their age, and if a spouse is involved, it will be a percentage based on the youngest spouse. Again, be sure to review your specific insurance contract for certain conditions, exceptions, and limitations that may apply. The owner can choose to receive a monthly check. If the policy owner dies, the spouse can continue to receive the monthly check until they die. If there is still money in the account when the policyholder dies, their beneficiaries can typically receive the remaining funds in a lump sum.

One of the biggest fears most seniors have is outliving their money. Including an FIA as part of your retirement strategy can help prevent that from happening.