When you should buy a fixed index annuity

When you should buy a fixed index annuity

Fixed Index Annuity is an opportunity for growth

Here are the five reasons when you should buy a fixed index annuity. If you do your research you will find many financial advisers have different opinions on this product. But the product does fit a niche for many to help with retirement income and possibly Long Term Care. Usually I ask clients to divide their money into two buckets. Safe money vs Risk money (some will call this concept Green Money vs Red Money). Fixed index annuities fall into the safe money category. Even though they act like an investment their is basically no risk to your principal.

When You Should Buy a Fixed Index Annuity

1. You Want Your Principal Protected (because the stock market freaks you out)

Scenario 1: You don’t want to lose a penny in the stock market and watching CNBC elevates your blood pressure too high.

Typically when a financial advisor offers you a guarantee, you have to tread carefully. But at the end of the day, there’s not many investments that can offer this other than annuity.

Equity-based investments tend to fluctuate in value, which is to say that they can go down as well as up. Annuities can protect your principal value, ensuring that your investment remains fully intact to earn income in the future.

This can be especially important if you are very close to retirement, and concerned mostly about providing yourself with an immediate income. As well, once you reach retirement, your ability to tolerate declining investment values will diminish. There simply won’t be enough recovery time to make up for any losses sustained. An annuity can remove that problem.

2. You Want Guaranteed Returns

Scenario 2: You want to know to the penny how much interest you’re going to make on your investment.

Annuities – mostly fixed annuities – offer guaranteed returns. Once again, if a steady income is your primary motivation for entering the investment, annuities can provide just that. Many types of annuities will provide you with a variable return – that will enable you to participate in higher investment earnings – but also assign a guaranteed minimum return. That can be just what you’re looking for.

Fixed annuity rates usually pay more than bank CD’s although you’ll have to lock up your money for 3-5 years to get it. Many times I have a client that wants absolutely nothing to do with the market and wanted a guaranteed return. CD’s were paying nothing and the best rate I could find was a 5 year fixed annuity paying 3%. But sometime clients really like the safety of this product vs the uncertainty of the market.


3. You Want Guaranteed and Predictable Income

Scenario 3: You want to know exactly how much your paycheck is going to be from your investment.

As I wrote earlier, annuities are investment contracts, and one of the more important provisions you can include is guaranteed income. You can do this with immediate annuities or the income riders that fixed index annuities offer.

You can buy an annuity and have it begin paying out an income stream immediately. Some deferred annuities with income riders will increase each year until you decide to start taking an income (think how your social security benefit increases each year you don’t touch it).

With annuities that offer an income stream, you’ll know exactly how much you’re going to get and how long whenever you decide to take it.

This is an excellent option in retirement since it operates as something very much like a standard pension. The big difference, though, is that unlike a pension if something happens to you or your spouse, the remaining funds would be passed on to your family.

4. You Can’t Get Life Insurance (and want to leave more to your heirs)

Scenario 4: You want to leave more to your heirs and can’t get approved for life insurance.

Since an annuity is an investment contract, and not a life insurance policy, you can often use an annuity to provide at least some of the same benefits in the event that you are unable to qualify for life insurance.

This is often the case if you have a health-related condition that makes life insurance either impossible to get, or prohibitively expensive. You can set up an annuity, naming your spouse as beneficiary, then the contract will automatically pass to him or her upon your death.

Some annuities also offer death benefit riders that can pay out a bit more than others. With an annuity, you won’t get as much death benefit as a life insurance policy, but you’ll get some.

5. You Want Some Long Term Care Benefits

Scenario 5: You want some long term care protection, but don’t want (or can’t afford) to pay for it out of pocket.

With people living longer than ever, there is growing concern for making some provision in the event that long-term care becomes necessary. Straight long-term care insurance policies are expensive, particularly as you get older.

Most of my clients that purchased long term care policies have done so because they had a personal experience with a loved one (usually a parent) that spent time in a nursing home. For them purchasing traditional long term care insurance was a no brainer. For others though, once they learn how much the premium is per month they often decide to take the chance of not buying it and paying for care out of pocket if they ever need it. A solution to cover part of the cost could be buying an annuity. Here are two annuities to consider:

  1. Hybrid Annuity or Insurance Products w/ LTC Benefit. There are products that offer either an insurance benefit to your heirs or a guaranteed return (albeit small) as the primary function. In the event you needed nursing home care, then policy would convert to a LTC policy paying a portion of the costs for a determined period of time. The amount and time depends on how much you pay up front and your age. Clients like this option because it’s not a sunk cost of paying the LTC premiums each month and offers some flexibility of getting your money back if you need it.
  2. LTC Double Benefit from Income Riders. For the annuities that offer a guaranteed income stream in the form of an income benefit, some carriers will also offer a “LTC doubler” benefit. How this works is let’s say that your income benefit is determined to be $20,000 per year from the annuity, and you needed LTC care. Instead of $20,000 per year, your benefit would then double to $40,000 per year while you’re in the nursing home. This benefit would last for 5 years and then revert back to the original $20,000 annual benefit lifetime income. Every carrier is different so it’s important to understand all the moving parts.

Both of these options aren’t meant to completely pay for 100% of your LTC costs, but it does help pay a portion of it.

Fixed index annuities on the Green Money vs Red Money Concept.

Red Money or Green Money?

Another way of understanding the difference between safety of your deposit and the volatility of an investment is looking at each as a color. Savings/ Income producing deposits could be looked on as “Green Money” and an investment would be known as “Red Money”. Neither Green Money nor Red Money is “right” and the other “wrong.” Each has its place as an asset class. But it is very important to not confuse the two. For retirement planning, it can be a crucial distinction, and can spell the difference between having enough income to last ALL of retirement, or running out of income before death.

Stockbrokers and investment managers will talk all day about “asset allocation” and “diversification.” However, ALL of their talk and focus is diversification within the Red Money sphere. The proper play is to create the two buckets of money. Green Money (Safe) and Red Money (Risk). One rule of thumb as to determine how much should be in each bucket is based on your age – 100. At 49 in theory my Red bucket should consist of 51% of my assets and my green bucket 49%. It is pretty easy math. The second equation will depend on how risk adverse you happen to be.

Fixed Index Annuities fall under the GREEN Money bucket. There is a place for them in your portfolio.



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