What’s behind the surge in fixed indexed annuity sales?
An FIA is a fixed annuity with a variable rate of return pegged to an investment index. It can do better than a fixed annuity if the index rises appreciably, and FIAs lose no money in a year in which the market is down. In addition, FIA buyers often purchase a lifetime income rider, which means they get a respectable annual income stream regardless of how the market performs.
Some buyers know exactly what they are getting with an FIA and have decided it is best for their situation. Many, however, don’t understand key product basics. In particular, many people falsely believe they are getting market-like returns with no risk. It's true that they don’t have risk, but they don’t receive market-like returns either. They get only a portion of the increase in an index, which today typically as little as 25 percent.
FIA buyers should always know this, but often they don't because brokers often don’t tell them. That’s because too many are more concerned with the high upfront FIA commission — typically 5 to 7 percent — and less concerned with serving their clients’ best interests.
Fixed annuities
If you want an annuity that is straightforward and simple (i.e., unencumbered by the likes of fees or riders), take a look at a fixed annuity. It pays more than a bank CD, offers a guaranteed interest rate and unequivocally states exactly what you will receive. The most popular type of fixed annuity is a Multi-Year Guaranteed Annuity (MYGA). MYGAs pay a guaranteed rate of interest, generally 2 percent to roughly 3 percent for three to 10 years.
Immediate annuities
Immediate annuities make the most sense for those who want to get the highest interest rates possible amid today’s record-low interest rates. Annual withdrawal rates in a typical non-immediate annuity average 4 to roughly 5 percent. By comparison, the annual payout of an immediate annuity can be as high as 10 percent, depending on the buyer’s age (the older the buyer, the higher the payout rate). And because the payout rate is derived from the tax-free principal invested in an immediate annuity as well as interest, taxes on payments are lower. The drawback of immediate annuities is that buyers sacrifice principal in exchange for higher payouts.
Deferred income annuities (DIAs)
DIAs are for people who want an annuity that offers the most for their money at some point in the future, but not today. A DIA is a high-paying immediate annuity that delays payments until the client elects to receive them years down the road. DIA withdrawals are also taxed at a lower rate. This type of annuity makes the most sense for 50 to 65 years old who are still working and don’t plan to retire for years. More so than other annuities, DIAs protect people from outliving their savings — and for less money. The drawback is uncertainty about how long you will live. You need longevity on your side to come out ahead.
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