5 Myths About Fixed Indexed Annuities You Should Ignore

By: Laura Adams

More myths swirl around annuities than any other financial product. Some of the confusion is due to the fact that annuities have changed over the years, offering more options and benefits than ever.

One of the most flexible types of annuities is a fixed indexed annuity (FIA). A FIA is a financial product that’s sold by insurance companies. The insurance company guarantees to protect your principal and give you the potential for growth linked to an index, such as the S&P 500. Plus, you can receive guaranteed lifetime income with a FIA

It’s important to understand the FIA facts as it relates to these 5 common myths:

Myth #1: If you have a retirement account you don’t need an annuity

Fact: One of the major benefits you can get from a fixed indexed annuity is the guarantee that you’ll never run out of money during retirement.

Having funds in a retirement account such as a workplace 401(k) or an Individual Retirement Account (IRA) is a terrific asset. However, those accounts don’t guarantee to give you an income stream that will last for your entire life.

Myth #2: All annuities charge high ongoing fees

Fact: The only time you’re charged a fee with a fixed indexed annuity is when you choose to add an optional policy rider.

For instance, if you choose a death benefit rider, which guarantees a payout to your beneficiary, or an income rider, which guarantees to pay you a set interest rate, you generally are charged a low fee in exchange for these benefits.

Myth #3: Annuities are too complex for the average person

Fact: An annuity is simply a contract you make with an insurance company get financial benefits in the future, such as during retirement. When you buy a fixed indexed annuity, you set aside some of your retirement savings in return for a future stream of income from that pool of money.

Myth #4: You always lose the balance of an annuity if you die

Fact: Fixed indexed annuities can allow you to pass the money in your annuity to one or more named beneficiaries after your death.

You can even choose to set up your annuity as “joint life” in order to provide you and your spouse guaranteed income for life, no matter how long each of you live. Another popular option is called a guaranteed return of premium, which insures that your beneficiaries receive the entire amount of money you put into the annuity.

Myth #5: Annuities are only for older investors

Fact: No matter your age, an annuity can be a smart way to diversify your financial portfolio.

Having a portion of your assets in a fixed indexed annuity can provide balance and stability for your retirement. Opting for guaranteed lifetime income gives you peace of mind that you’ll always have a dependable stream of income to depend on as you age.

Today’s fixed indexed annuities offer a range of benefits designed to protect your retirement savings from market loss, give you income for life and allow you to pass along money to your heirs.

To learn more about FIAs, be sure to watch this video: What Is a Fixed Indexed Annuity?

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Securing Your Retirement Version of ‘Happily Ever After’

Finances can make or break a relationship. Whether it’s deciding who picks up the check on the first date to who will pay the bills, it’s important to have an open conversation about finances with your partner. When it comes to planning for retirement, the earlier you have the conversation, the better.

Each of you might have your own idea of how to accumulate wealth for those later years. One might want to invest in the stock market; the other might want to put a little bit away in a 401(k).

Retirement saving preferences vary, but couples need to consider that they will be retiring together, and therefore must plan accordingly.  Avoiding the discussion will only cause more problems in the future. Newly retired individuals report the lowest marital satisfaction and highest number of conflicts compared with those who have been retired for a long time or those who are still employed, according to a 2013 Fidelity study.

Consider utilizing a Fixed Indexed Annuity, or FIA, to safeguard a portion of your retirement. An FIA can provide the stability of protecting your nest egg and still give you the opportunity to earn as the market rises. Your principal is protected and will never decline in value due to market downturn.

With FIAs, your money is only taxed at the time of distribution – not before – allowing it to grow tax deferred. The guaranteed income from an FIA could be used to supplement the lifestyle that your and your partner want in your later years – giving you both the peace of mind to enjoy your retirement together.

Learn more about FIAs here.

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IALC At FinCon14: Where Money and Media Meet

This week, the IALC will be heading to FinCon 2014 in New Orleans, LA. FinCon brings together journalists, bloggers and financial strategists to talk shop on financial planning, personal finance, investment, retirement and more.

We look forward to talking with media and money experts from across the U.S. about the benefits of considering a fixed indexed annuity as part of a balanced financial future. After all, we want everyone to have a chance to have a secure retirement future. Follow us on Twitter @IALCouncil throughout the event and participate in the conversation by sharing your dream retirement using the hashtag #DreamRetirement.

If you’re headed down to the Big Easy as well, be sure to stop by the IALC booth for more information on fixed indexed annuities, fun and a chance to win an iPad Mini!

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Employee Retirement Income Security Act Faces Scrutiny in a Changing Retirement Landscape

The Employee Retirement Income Security Act (ERISA) just marked its 40th birthday. It was with high hopes that President Gerald Ford, on Labor Day 1974, signed it into law as a consumer protection law. Today, after several amendments, ERISA sets standards of protection for participants in most pension and health plans in the private sector. A recent Pensions and Liability article on ERISA explored the 40-year history of the law that was supposed to protect consumers, but is now motivating employers to adopt retirement plans providing a less secure future for employees.

What’s the problem? ERISA has resulted in employers shying away from the investment risk of defined benefit plans and moving to defined contribution plans, like your 401(k), where employees bear the investment risk of their retirement futures.

Since defined contribution plans focus on retirement asset accumulation and not retirement income as defined benefit plans do, it is important that you take control of your retirement income plan. One important way you can do that is by considering a Fixed Index Annuity (FIA). An FIA allows you to set aside a principal amount that will remain protected in the event of a market downturn, with capped interest growth if the market rises. An FIA will protect your nest egg and give income options providing a retirement income you can depend on for life.

Visit our Smart Buyers Checklist to ensure you are asking the right questions when purchasing an annuity and preparing for your retirement.

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New Study Shows One-Third of Americans Have Zero Retirement Savings, Why?

When Americans imagine retirement, they think of the lifestyle shown on television filled with travel, golf, family and new adventures. Unfortunately, many Americans are unprepared financially to support that dream.

Thirty-six percent of people in the U.S. have no retirement savings, according to a recent study conducted by Bankrate.com. This includes 26 percent of adults between the ages of 50 and 64 – one of the most crucial age groups for retirement planning and saving. This generation acknowledges the importance of saving, with 32 percent of people feeling less comfortable with their overall savings than they were a year ago. So if they know they should be saving, why aren’t they?

Here are three reasons why many Americans don’t have enough saved:

  1. They do not know how much they need. As life expectancy continues to rise, more money is needed for retirement to cover basic costs. In addition, more money will be needed for health care as the population ages. Make sure you know how much you will need by using one of our retirement calculators.
  2. They are sandwiched: Many eager-to-retire Baby Boomers are part of the sandwich generation, which means they help support both their grown children and their parents.
  3. They were hit hard by the Great Recession: Many 50-64 year olds were dedicated savers, but the stock market crash and housing bubble impacted their lifetime savings. Many lost much of their savings in the stock market, which emphasizes the importance of having a diversified portfolio.

With the volatility of the stock market and less guaranteed employer income, the importance of having a diversified financial plan is more acute than ever. Fixed indexed annuities can play an important role in solidifying your retirement plan by offering peace of mind through guaranteed income. In addition to mitigating risk in down markets, fixed indexed annuities offer the opportunity to earn additional interest when the markets are doing well. Check out our video on the basics of fixed indexed annuities for more information on how this product can fit into your plan.

For more information about this retirement trend visit Bankrate.com.

 

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Save now, See the World Later

Retirees often look forward to spending time with their families, enjoying leisure activities, and for a majority of Americans – travel.

Though many Americans plan to spend their retirement seeing the world, according to a recent study by The Global Coalition on Aging (GCOA) and Transamerica Center for Retirement Studies (TCRS), less than 20 percent of Americans have seriously factored travel expenses into their retirement savings plan.

Travel is an excellent way to maintain health and mental vigor throughout retirement. In fact, people who travel during retirement show higher levels of satisfaction physically, emotionally and financially than non-travelers, but it needs to be planned for. According to the same study, nearly a quarter of Americans believed travel was worth saving for and it was the second place for retirement goals, only slightly surpassed by spending time with family.

With travel as a highly beneficial and highly desired aspect of retirement, it is important to begin saving early and budget the right amount. Make sure to examine if your finances are able to keep up with the lifestyle you have envisioned. Travel, especially international, has high costs. As part of a balanced retirement plan, fixed indexed annuities (FIAs) can offer an opportunity for a steady, guaranteed lifetime income, which can be used for bills and other expenses; which can give you peace of mind and even the financial ability to travel.

Visit our Smart Buyers Checklist to ensure you are asking the right questions when purchasing an annuity and preparing for future travels.

 

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Annuity Riders Protect Aging Seniors

As baby boomers age and face the rising cost of care, many may experience anxiety about how they will pay for their increased living expenses. According to a recent article in SeniorHomes.com, though high health care costs could be a big problem, an annuity properly used can help seniors fund their health care costs.

An FIA can provide the policyholder with the financial support they need to pay for unexpected health expenses. FIAs offer solutions to these problems by offering riders to policies that either are or may be added to an annuity to protect policyholders’ future long term and immediate health costs needs.  These riders can provide additional financial flexibility as unforeseen health costs confront the insured. This includes certain amendments that expand the purchased policy’s benefits.

Two riders are available for fixed indexed annuities to ensure consumer protection in extenuating health circumstances: Nursing-Home Riders and Terminal Illness Riders.

Nursing Home Riders: As life expectancy rises, the cost of late-life care is also increasing. In order to ensure that consumers can access their funds if long-term care is needed, either in-home care or in a nursing home, the industry put nursing home riders in place. By accessing the funds, seniors may be able to put more of their retirement income towards nursing home needs. The specifics of these riders can vary with each annuity product, but they can help increase the monthly income-for-life feature on your annuity or allow you to access more of the accumulated value of your annuity.

Terminal Illness Riders: Terminal illness riders are available for many fixed indexed annuities. If an insurance holder is diagnosed with a terminal illness, the insurance company will allow you to access a portion, up to the entire premium without having to pay early withdrawal fees or surrender penalties.

Ask your agent about what riders are included in your policy and what other amendments are offered. Also, be sure to visit our Smart Buyers Checklist to ensure you are asking the right questions when purchasing an annuity.

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Why Uncapped Does Not Mean Unlimited

The insurance industry is constantly innovating to meet the individual financial goals of consumers or the public–and the latest addition to the fixed index annuity market is the “uncapped” Volatility Control Index Strategy. This crediting method is now offered on many fixed index annuities today and enables the consumer to take advantage of well-performing market indices without an index cap.  However, it is important to continue to ask the right questions when considering adding any annuity to your retirement plan.

An important point to keep in mind about these new product offerings is that “uncapped” does not mean “unlimited”.  A volatility controlled index shifts assets between a risk component and a risk-free component to reach the targeted volatility level.

Therefore, although an uncapped annuity strategy does not use index caps to limit the returns for consumers, there are still limits on the potential returns due to the volatility control mechanism itself.

The Indexed Annuity Leadership Council promotes the transparent marketing of products to consumers. IALC recommends marketing the product as a “volatility controlled indexed crediting method” versus an uncapped annuity, to ensure that consumers understand the product there are purchasing.

In the industry today, we are seeing the product being marketed as a low-risk, high-reward with unlimited potential for earnings while still being a safe vehicle for savings. The positioning of the product in this manner could set up unrealistic expectations for consumers.

Are you unsure which questions to ask prior to purchasing an annuity? Use the Smart Buyer Checklist. This list provides a question guide to use when purchasing annuities.

 

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The Changing Price Tag on Healthcare?

With both health care costs and life expectancy continuing to rise, many Americans are forced to commit more of their financial resources to health care plans. One solution growing in popularity is concierge medicine.

Through a membership program, concierge medicine allows patients to have unfettered access to their primary care physician. Patients are able to make personal calls to their doctor, receive house calls and communicate via email about ongoing conditions.

Typically, concierge practices come with a hefty price tag, but currently there are an estimated 5,500 concierge medicine practices with about two-thirds charging less than $135 per month, on average.  Doctors who participate in concierge medicine take on fewer patients, with many taking on only 10 percent of the patients that traditional doctors treat.

Many patients participating in concierge medicine find that they benefit from the personal attention given to them by their concierge doctors. There is more focus on long-term diagnosis, individual lifestyle issues and discussion of preventative care plans, which can impact the bottom dollar of healthcare costs.

Whether you choose to participate in a concierge medicine program or plan to stay with the traditional health care model it is important to financially prepare for the increasing costs of health care. According to the latest retiree health care costs estimate calculated by Fidelity Benefits Consulting, a 65-year-old couple retiring this year is estimated to need $220,000 to cover medical expenses throughout retirement.

By making savvy financial decisions, many retirees are finding it possible to participate in a concierge medicine plan by setting money aside in a financial product such as a fixed indexed annuity.

What is a fixed indexed annuity? Learn more here. 

With FIAs, your money has the ability to grow tax free, only taxed at time of distribution; your principal is protected; and will never decline in value. The guaranteed income from a fixed indexed annuity could be used to supplement the membership costs of concierge medicine.

Set yourself up for a healthier retirement by making healthy financial decisions.

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Indexed Annuity Leadership Council Open Letter to the Editor of AARP Magazine

May 22, 2014
Indexed Annuity Leadership Council Open Letter to the Editor of AARP Magazine

Dear Editor:

We recently read the financial planning article by Allan Roth in your March/April issue and were disappointed to see factual inaccuracies, as well as open-ended questions, that could lead to confusion among readers regarding fixed indexed annuities (FIAs).

FIAs are a type of fixed annuity that earns interest on the premium, based on positive changes in a market index. The interest rate is guaranteed to never be less than zero, even if the market goes down. That is because the index is used as a benchmark only and an index annuity policy owner is not actually invested in the market.  This offers balance and protection, so once interest is credited it can never be lost, even during market downturns.

For more details on the basics of fixed indexed annuities, we have created this educational video.

We acknowledge that FIAs are not for everyone and shouldn’t be viewed as an individual’s sole retirement vehicle. In fact, issuing companies are required in most states to evaluate every indexed annuity sale for suitability based on the customer’s age, financial situation and goals.

As such, in 2010 the National Association of Insurance Commissioners (NAIC) enhanced the regulatory framework that holds insurers responsible with suitability compliance. Within this framework producers must have ‘reasonable grounds’ to believe that the annuity recommendation is suitable based on 12 areas of ‘suitability information’ disclosed by the consumer. The model regulation further provides FIAs can only be sold by licensed insurance professionals who are mandated to receive product-specific training.

Mr. Roth questions the validity of FIA guarantees in the article- let’s look back to 2008 and 2009 when Americans lost an unprecedented amount of retirement savings because of stock market volatility. Those who had fixed indexed annuities lost nothing due to market downturns.  FIAs have minimum guarantees and are backed by some of the world’s largest, most reputable insurance companies.

Insurance companies must show they have the financial capacity and ability to make these guarantees and their products have been reviewed and approved by state insurance regulators. In addition, insurance companies are continually audited by these same regulators and must comply with stringent requirements to ensure they have the ongoing ability to meet these commitments.

The article also questions fees and how FIAs can deliver market-like returns without risk. While agents are paid commission, no sales compensation is ever deducted from the annuity’s principal. Fixed indexed annuities are a safe retirement vehicle that protects a consumer’s nest egg and are guaranteed by the issuing insurance company.

The author’s final question asks about disclosure documents – the Indexed Annuity Leadership Council (IALC) advocates for the consumer and on behalf of insurance companies for full transparency and disclosure.  In addition to state required disclosures about the specific product, an agent should help a client read through the content and answer any and all questions before the customer signs on the dotted line.  Further, insurance products have Right to Examine or ‘free-look’ periods mandated by state law in which a customer may, for any reason, return their contract for a full refund of the premium within that timeframe.  If a customer isn’t sure what questions to ask about FIAs, we offer educational resources.

On behalf of the IALC, if AARP is looking for additional resources or experts I am happy to be a part of the next story on retirement financial planning to ensure readers are given a comprehensive review of savings options to help them navigate this important topic.

Sincerely,

Poolman Signature copy

Jim Poolman
Executive Director
Indexed Annuity Leadership Council
FIAinsights.org

 

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