A fixed index annuity is in the most basic sense an insurance product and not a security. For years it has been described as equity index annuity but using that terms adds a lot of confusion as it means an equity investment such as stocks and bonds. As such, it becomes a security offering.
What the fixed index annuity is that it increases in value based on the stock market index, however it doesn’t directly hold stocks. Because of that, it isn’t a securities offering and is regulated by the insurance industry rules, not the SEC.
So basically, fixed index annuities:
1. Offer principal guarantees with potential growth linked to a major stock market index.
2. Allow investors to get money back in the worst-case scenario, as well as profit successfully when things go well.
3. Offer reasonable profitability, excellent safety, decent flexibility and lifetime guarantees when paired with lifetime income riders.
List of Pros of Fixed Index Annuities
1. Guaranteed Principle
With whatever investment option you choose, limiting your risk is one of the most important things. You may be looking for a high return, but you also don’t want to make yourself vulnerable to high risk. This is why a fixed investment is ideal because it offers a principal guarantee. It’s a great investment option especially nearing retirement as you can protect the assets that you collected over your lifetime.
As this is a time when you shouldn’t play risks, it helps to be more cautious with your investment options. With fixed index annuities, you have a secure investment with a guaranteed principle. In addition, you can access a normal interest rate no matter how the market is performing. As such, you have limited your risk.
2. Market Participation
Even if you’re a conservative investor who doesn’t want to encounter too high a risk, you can still participate in the market with a fixed index annuity. This type of investment vehicle, you can see a gain in principal as the market performs well. When the index rises, you can add to your earnings. You can earn the minimum guaranteed when the market surges ahead. As such, market participation does pay off.
List of Cons of Fixed Index Annuities
One of the disadvantages to this kind of investment is that you should always be aware of involve duration. All fixed index annuities are for at least five years – and that’s at a minimum. What this simply means is that your assets have to be in the market for this amount of time. In other words, you should pick this option when you aren’t sure you can remain solvent for at least five years. So if you’re looking for more liquidity, especially in terms of retirement options, this may not be the best option for you.
2. Limited Gain
A fixed index annuity is a more cautious type of investment. Meaning, you don’t get access to a high upside or huge gain. It is designed to be a safe investment and the market participation is limited to a certain extent. While you do have limited risk, the potential for gain is limited too.