Historic market volatility combined with less accessibility to traditional retirement income sources has shifted the responsibility from employers to the workforce to save for their future. With this greater responsibility comes a need for financial solutions that can help provide a new level of protection for retirement savings.
Despite the potential to earn guaranteed income for life, many Americans are conflicted on the benefits and possible drawbacks of purchasing a Fixed Indexed Annuity. In this episode of Money Script Monday, Sean provides clarity on the 5 most common myths surrounding Fixed Indexed Annuities.
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Hello and welcome to another edition of Money Script Monday.
My name is Sean Brady and today's topic is the truth about FIAs, myths versus realities.
When it comes to annuity products, fixed index annuities or FIAs have been around for a relatively short period of time.
Created in 1996, FIAs are insurance products, not investments, that allow for the opportunity for interest potential while protecting you from market risk or market declines.
However, as with many new ideas, myths abound.
Myth number one, FIAs are too complex to understand.
The reality is understanding FIAs is actually not that difficult. It requires you to learn a couple of basic terms and that's because interest earnings are calculated in various ways.
FIAs have the ability to earn interest potential based on changes on an external market index.
That's things like the the S&P 500 Index while offering you protection from principal loss due to market declines or market losses.
However, a client's money is never directly invested in the market, and that's because the clients don't actually own stocks, bonds, index funds or other investments.
Insurance companies are really good about providing resources so that clients can really understand FIAs and their benefits and how they work and that way they're able to make an informed financial decision whether or not they want to purchase one.
As with many fixed annuities, FIAs offer a variety of valuable benefits.
That's things like tax deferral, a guaranteed minimum value, death benefits, and an income option, so converting your annuity into a lifetime guaranteed income.
Now myth number two, FIAs have high fees.
The reality is when it comes to fees, lots of financial products out there have fees and FIAs are no different. They carry with them some fees.
Insurance companies turn around and use those fees to support those promises that they're making, those guarantees that they're making, as well as provide those valuable benefits that I just mentioned.
Those benefits are things like interest being earned on external market index being credited to your policy.
Those are benefits like protecting you from market loss, where your principal's protected.
Things like a guaranteed minimum value being credited with a guaranteed interest rate as well as that income option.
FIAs having the capability to convert into a guaranteed stream of income for life.
Now myth number three, FIAs tie up your money for years.
The reality is FIAs don't tie them up for years.
Most products today, the surrender charge periods are less than 10 years.
In some cases in some of FIAs, the surrender charge period is as short as five years.
Most of the annuities out there offer you at least access to a portion of your money very early on; 10%, 20% whatever the contract provides.
That could be as early as one year after you issue the contract or as early as in the first contract year without any surrender charge penalties or contract penalties.
There's just a multitude of ways you can access your funds without penalties.
That's features like I just mentioned, the penalty-free withdrawals, that's things like loans, nursing home provisions, as well as access to the full accumulation value being paid to your beneficiaries upon death.
These are all now very common features in FIAs today.
Myth number four, FIA values must be annuitized.
Again, there's just are multiple ways of being able to access your accumulated value without taking annuitization.
There are still contracts out there that require annuitization, but with today's products, there's a lot of ways you can access the money.
You can access the full lump sum after the surrender charge period or in many different ways.
You can have the option that are sometimes built into the contract or added on as an additional rider for an additional cost where you can turn your accumulated value into a guaranteed stream of income for life.
Finally, myth number five. If you die, the insurance company keeps all of your money and this is simply just not true.
The reality FIAs let you choose a beneficiary.
Your beneficiaries are entitled to receiving the contract's death benefits if you die prior to taking annuity payments.
They also have the option of if you've initiated those annuity payments to continue those annuity payments into perpetuity based on a contract and in lieu of the death benefit.
It's also important to note the death benefits in most cases is determined upon the kind of contract you're in, the terms of that contract.
With most products, the death benefit's going to equal the accumulation value, which is the policy value plus any interest credited to the policy, less than any of withdrawals that you might've taken over the course of owning that particular policy.
Now, an FIA is a great solution in many cases.
The reality is with the volatility that we're experiencing in these financial markets in recent years coupled and combined with the limited availability of retirement income sources, things like pensions.
Americans today are really experiencing a greater responsibility to ensure their own retirements and their own futures.
It's really falling back on us to take care of that and the decisions that we make.
That's why an FIA is a great solution for your overall retirement income plan.
It's also important to note that annuities aren't right for everybody.
If you're deciding to purchase an annuity, it's really important that you only do so after you consult a financial professional.
That's why I urge you to contact a financial professional today to see if an annuity is appropriate for you.
Thank you, and we'll see you again next time on Money Script Monday.