A third important advantage of a fixed index annuity is the range of guarantees and optional protection benefits available. These benefits allow you to transfer risk to the insurance company issuing the fixed index annuity. These guarantees help protect your assets, your retirement income, and your beneficiaries. In exchange for the risk transfer, the benefits may carry an additional cost that will vary by product and company.
Annuities are subject to surrender charge periods which can vary, but are generally between five and 10 years in duration. As long as you abide by the terms of your contract, you will not lose any of the money you place in your annuity due to surrender charges. And any interest credited to the contact is locked in and protected as well.
A fixed index annuity puts you in control of your future income, based on the annuity you choose and how much money you put into it. After your contract has had an opportunity to earn interest over its deferral period, you can begin distribution. You can then receive your contract's values in a stream of income that will last your lifetime (or longer). The amount of your payments is based on the value of the contract on the date you begin distribution and the payout schedule you choose. You generally have two choices for receiving income payments: annuitization payments or income withdrawals – each of these payment types is taxed differently. For annuities that are not held in a qualified plan such as an IRA or a 401(k), part of each annuitization payment is a tax-free return of what you paid for the annuity and part is taxable as interest you earned on the annuity. On the other hand, income withdrawals under the same annuity are fully taxable until the interest you earned has been taxed, then you withdraw what you paid for the annuity tax-free. It's always a good idea to consult with your tax advisor before choosing between annuitization payments and income withdrawals if you have any questions or concerns about which income payment type may be best in your own particular tax situation.
Protection With Income That Can Increase
As we noted, an FIA allows you to convert your annuity's value into a series of fixed-amount payments. Depending on the product you choose, many FIAs go beyond this. They offer benefits or optional income riders with payments that can increase to help you keep pace with rising costs throughout your retirement. Your income payments will be scheduled as withdrawals you can begin anytime after you reach a certain age (often age 60). And with some FIAs, your income payments will be larger if you postpone taking them for a few years. These income riders or benefits provide a valuable benefit, but they usually come at a cost. Talk to your financial professional about the income options offered by the FIA you are considering, and be sure you understand any costs and restrictions. Please note that withdrawals may be subject to regular income tax and, if taken prior to age 59½, a 10% federal tax penalty may apply.
Your payments may increase based on positive changes in your selected indexes.
If you pass away before you begin to receive scheduled annuity payouts of the contract's value, your beneficiary will receive a death benefit. And in some cases, even if you pass away after you've begun to receive income from the annuity, it's still possible your beneficiary will receive a death benefit. Your beneficiary may choose to receive your contract's values in a single payment or in a series of payments over time. The death benefit may be a reason some individuals purchase annuities even though they have no immediate plans to receive their contract values. They simply want to know the money is available (may be subject to a surrender charge) should they need it – and that it can be passed on to their beneficiaries if they don't use it.
Because the guarantees in an annuity are important, it's important to consider who backs those guarantees. The guarantees are backed solely by the insurance company that issues the annuity. That's why you should know about the financial strength and stability of the company. Ask about their: Ratings – independent agencies' opinions of a company's strength and ability to meet its ongoing insurance policy and contract obligations.
Risk management capabilities – a company's track record of successfully hedging against potentially extreme market events.
Management philosophy – a company's commitment to stability and reliable, long-term performance.