Fixed Indexed Annuities

Fixed indexed annuities

Fixed Indexed Annuities

Fixed Indexed Annuities

Investors who had experienced considerable losses and watched helplessly as their investment portfolios fell to pieces during the last economic crunch are making much more cautious investment decisions today than ever before. Over time, fixed indexed annuities have gained a lot of appeal to most investors compared to treasury bonds, bills and notes, IRA CDs and other financial products.

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What are fixed indexed annuities?

An indexed annuity is simple one that earns interest on a specific equity index. They are provided by insurance providers who offer a guaranteed minimum to protect you in the event the stock index performs poorly. Every annuity comes with a fixed-interest rate that determines the amount of returns which the principal investment generates. With fixed indexed annuities, the interest rate on returns is linked directly with the performance of the stock market.

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While the interest rate is guaranteed by the insurance provider, a higher rate on return may be received should the market index perform exceptionally well. There is a maximum cap on the highest rate on return that may be gained; there are fees involved which get deducted from the total yield received by the investor. Your investment is insured by the SGF (State Guarantee Fund) and exempt from taxation till it starts paying up.

Fixed indexed annuities: the pros and cons

There are many advantages and disadvantages of having fixed indexed annuities. Here is a look at its pros;

The most obvious advantage of a fixed indexed annuity is the opportunity for a higher rate of return in the event the associated index performs well.  There has been a lot of debate about the future, potential of insolvency and possible ineptitude surrounding the social security program.

Many people are afraid that the system will resort to drastic decreases or a complete disbandment of all benefits. With fixed indexed annuities, you can be guaranteed of a steady lifetime income. The element of tax deferral is another feature that has won the hearts of many investors. Unlike other options that are taxed at the end of each year, a fixed indexed annuity allows for delayed/ deferred taxation.

Here is a look at its disadvantages;

Once you have out your money on this form of investment, you cannot touch it prior to full maturity. In addition to this, the maximum interest cap on returns & fees charged by the insurance provider can ‘eat’ into the profit earned. This is why you should be careful when choosing an insurance provider; go for a reputable company that has a good past record.

It is also important to note that as much as fixed indexed annuities offer the promise of good returns, the maximum cap on interest and management fees can limit the profits gained at the end of the day.

Choosing a fixed indexed annuity

You must read the policy details, know about the returns and all costs involved before buying an annuity as once you invest in it, you’re in it for life. You will need the help of a financial consultation firm or adviser to help you get started.

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