Benefits of Fixed Index Annuities

See how the benefits of a fixed index annuity work together to keep retirement income planning on track. We look at six top fixed index annuity benefits: principal protection, tax deferral, growth opportunities, liquidity, guaranteed income and beneficiary payments.

Three women in retirement jogging on a boardwalk

kali9 / E+ / Getty Images

Fixed index annuities can help provide greater financial confidence, no matter where one is in their retirement income planning journey or what happens in the market. They are meant to address many of the basic retirement concerns such as: tax-deferred growth, lifetime income, guarding hard-earned money, and creating a balanced portfolio. 

Retirement is not so much a finish line, but more of another leg of a race. There is strategy in preparing for such an endeavor similar to athletes training before the big day; although an advantage of retirement planning is that it allows for adapting one’s strategy mid race and being able to correct the direction. When considering fixed index annuities and their benefits, weighing risk and financial goals can set the pace for a more manageable retirement income-planning journey. 

The phrase “teamwork makes the dream work” is relevant to many situations and retirement is no different. A sound retirement income plan is like a relay race – the pieces all work together to help position you for success through each leg of the run, up to and past the retirement finish line. As part of a comprehensive strategy, fixed index annuities offer a combination of benefits that can help build, secure and sustain retirement income. 

Below, we highlight six key fixed index annuity benefits that can help that retirement "relay" plan.

1. Principal protection is a fixed index annuity benefit, helping secure long-term stability.

A fixed index annuity is an insurance product designed to ensure continual and consistent retirement income.  Funds contributed to a fixed index annuity can never be lost due to market volatility.

This can be an especially vital benefit for many Americans who are facing their golden years with trepidation about their savings. In a 2022 study, in partnership with the Insured Retirement Institute (IRI) and American Equity, only 43% of near-retirees responded that they feel like they’ve saved enough money for retirement or they are unsure about their savings. The same study also indicated that 66% of retirees would feel more retirement security if they had more guaranteed lifetime income.1^Insured Retirement Institute, American Equity: "Aligning Retirement Expectations with Financial Resources," 2022 As part of a comprehensive strategy, a fixed index annuity can provide benefits like principal protection and help create stability in retirement.

2. Tax-deferred growth potential is a great opportunity to help build up an income source.

Along with protection from index-decreases, most fixed index annuities also help shield money from annual taxation on interest, as long as the funds remain in the annuity. Funds held in an annuity are generally taxed as ordinary income when withdrawn. This allows a nest egg to grow tax-deferred with compounding interest through the accumulation phase, further shoring up resources for when you choose to take an income.

Because a fixed index annuity offers the opportunity to earn interest on principal, and on interest earned (with taxes deferred), it offers a path to jump-start retirement assets that may not be available with a non-tax deferred account. These benefits can be a welcomed option for many Americans. As part of the IRI study, 60% of American workers nearing retirement and those already retired, responded that their income would not cover expenses during retirement.1^Insured Retirement Institute, American Equity: "Aligning Retirement Expectations with Financial Resources", 2022

3. Growth opportunities are appealing to those looking for increased asset potential without risk exposure.

In addition to principal protection, any interest credited to a fixed index annuity is also protected. As an insurance product, a fixed index annuity is not directly invested in the market. Rather, interest is credited based on the performance of an external index (e.g., S&P 500®). Contract owners typically have the flexibility to choose among a variety of index-linked crediting strategies, many of which include a cap or participation rate. Once interest is credited, it can never be decreased due to market volatility.

4. Liquidity is an important benefit.

Fixed index annuities offer a variety of liquidity options. Many fixed index annuities allow the owner free withdrawals up to 10%.^The annual free withdrawal amount available differs by insurance company and annuity product. Withdrawals made before age 59 1/2 may be subject to a 10% federal tax penalty. of the annuity’s value each year without a penalty, during the accumulation phase. Many annuities also offer increased or full access to the contract value for qualified care needs.^Waiver of surrender charge features vary by insurance company and annuity product; some features may require the owner to pay a fee.

5. Guaranteed income with a fixed index annuity provides long-term income stability.

Following the accumulation period, income payments can begin. These payments can be taken as a lump-sum, fixed installments over a specified period (e.g. 20 years), or as guaranteed payments for the rest of the contract holder's life.

A basic fixed index annuity typically does not have any associated mortality and expense fees, management fees or administrative fees, which are most often associated with variable annuities. Fixed index annuities are typically intended to be long-term investments, so there may be fees for withdrawing more than the allotted penalty-free amount.   

Many contract owners elect to add optional riders to their fixed index annuity, such as a lifetime income benefit rider. A lifetime income benefit rider provides increased payout flexibility by allowing the owner to receive lifetime income payments during the annuity’s accumulation phase. Some riders come with no fee, and others come with an annual fee.

6. Take care of loved ones by ensuring fixed index annuity funds are paid directly to a named beneficiary.

A fixed index annuity allows contract owners the opportunity to designate a beneficiary to receive a death benefit upon the owner’s death, instead of requiring funds be paid to the owner’s estate. This may help loved ones avoid the expense and time of probate. If a contract owner dies during the accumulation or distribution phase, the annuity guarantees direct payment to the named beneficiary. Depending on the contract, these payments may be in the form of a lump-sum, series of payments, or lifetime payments.  

Reliable Retirement Benefits

Retirement is different for each individual - with unique financial plans and goals. Fixed index annuities focus on many of the basic retirement goals while providing greater financial confidence. As part of the IRI study, both retirees and near-retirees expressed that they were highly interested in fixed index annuities, when the benefits were properly explained.

By design, fixed index annuities aim to protect and potentially grow money over time in order to deliver a stream of reliable income payments. A product with a simple and transparent design can be an integral part of a retirement income strategy.

For those looking for stable retirement options, a fixed index annuity with a simple and transparent design, can help deliver a steady stream of reliable income. This is echoed in the IRI study where 87% of near-retirees said they were likely to purchase a financial product described as a fixed index annuity.1^Insured Retirement Institute, American Equity: Aligning Retirement Expectations with Financial Resources, 2022

Sources:

 

This content is for informational purposes only, and is not a recommendation to buy, sell, hold or rollover any asset. It does not take into account the specific financial circumstances, investment objectives, risk tolerance, or need of any specific person. In providing this information American Equity Investment Life Insurance Company is not acting as your fiduciary as defined by the Department of Labor. American Equity does not offer legal, investment or tax advice or make recommendations regarding insurance or investment products. Please consult a qualified professional. Annuities are long term vehicles designed for retirement income and are not suitable for everyone. They involve restrictions and charges, including possible surrender penalties for early withdrawals. Annuity distributions are subject to ordinary income taxes, and if taken before age 59-1/2 may incur an additional 10% federal penalty. Guarantees are based on the financial strength and claims paying ability of American Equity and are not guaranteed by any bank or insured by the FDIC. Availability may vary by state. Possible interest credits for money allocated to an index-linked crediting strategy are based upon performance of the specific index; however, fixed index annuities are not an investment, but an insurance product, and do not directly invest in the stock market or the index itself. Product and feature availability may vary by state. The “S&P 500®” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by American Equity Investment Life Insurance Company (“AEL”). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). These trademarks have been licensed to SPDJI and sublicensed for certain purposes by AEL. AEL’s products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their respective affiliates, and such parties make no representations regarding the advisability of investing in such product(s) and have no liability for any errors, omissions, or interruptions of the S&P.