What Is A Fixed Index Annuity?
A fixed annuity is an investment product that offers low risk and guaranteed return for the investor. It basically serves as a secondary income for senior citizens. This type of insurance is usually available through retirement plans. Some fixed annuities also come in the form of life insurance policies.
Fixed indexing annuities are basically insurance products that provide fixed interest rates and usually protect against loss. The interest rates are usually based on the current indexing interest rate environment. They are sold by regulated and licensed insurance companies. An individual interested in investing can buy them from the broker or through an insurance company. Investors should have a good knowledge on how the fixed annuity products work and be aware of the key terms involved.
When an investor invests in a fixed index annuity, he gets the same interest earned within the period that he has bought it. There are various types of this insurance product and the most common one is the indexing annuity. Indexing interest earns are subject to changes in the market performance and hence, the gains and losses are passed on to the buyer in the form of fixed interest earnings.
In this type of insurance, the investor purchases it from the insurance company and then becomes its owner after selling the policy. This ensures that the interest earned is not affected by market volatility during the accumulation phase and the guaranteed income continues throughout the retirement savings phase. The insurance company pays the guaranteed income on a monthly basis after the accumulation phase.
One of the main features of the fixed index annuity is its guaranteed income rider. This rider guarantees that the guaranteed income will continue even during the accumulation or distribution stage. Most of these products also have a lifetime income rider. The lifetime income rider guarantees a fixed interest rate and a certain minimum amount of principal at retirement. If the market value of the investment in the pension scheme drops, the guaranteed income rider will help to compensate for the loss.
Over the years, there have been many debates whether index annuities provide a secure option for retirement. According to many experts, these schemes have helped a lot of seniors to supplement their retirement savings. However, critics argue that the fixed annuity is more risky as compared to the variable annuity as it is based on a particular riskless asset. They further add that the guaranteed interest rate in fixed annuities is low and this reduces the ability of seniors to make large investments.
Some experts also believe that the tax deferral feature of a fixed index annuity increases the chances of early retirement. With this feature, the retiree enjoys tax deferral on any earnings through investments made during the period of his or her participation in the plan. With tax deferral, there is no need to pay tax on withdrawals during the plan period. However, if the plan participant keeps on contributing during the retirement period, then the participant may lose some tax relief. The plan participant should therefore keep a record of all the contributions made during the plan period as well as the earnings and the deduction made from such contributions.
The fixed index annuity contracts generally end at the end of the income phase. In most of these contracts, the distribution amount is credited to the participant’s regular income stream on the date of death. The money thus credited to the account is treated as an asset and not a liability. Any withdrawal from the account is credited to the estate tax payable by the deceased participant.