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A safer course in choppy markets: Annuities with principal protection from market volatility
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Market downturns may have caused some clients to begin reaching out with concerns about how market volatility could impact their retirement nest eggs. Now may be an appropriate time to educate your clients about fixed indexed annuities (FIAs) and how they can be part of a retirement strategy that offers both growth potential 鈥� and protection of principal from market loss.
How do FIAs differ from investing in the stock market?
Annuities are often perceived as a bit mysterious to people. Some hear the word 鈥渋ndex鈥� and immediately associate the product with direct exposure to equities. However, FIAs are insurance contracts, not an investment in stocks. The insurance company guarantees that the initial premium won鈥檛 be lost due to market activity. This misperception can prevent people from using FIAs for retirement planning 鈥� missing out on the advantages they can offer.
With a FIA, growth is benchmarked to a stock market index such as the S&P 500庐. 鈥淥ne of the biggest misconceptions is that if the contract owner elects to have a portion of their premiums allocated to the S&P 500庐 annual point-to-point index, that their premiums are invested directly in the equities which comprise the S&P 500庐. They are not,鈥� says Rod Mims, Senior Vice President of National Sales at 麻豆传媒 USA. 鈥淩ather, premiums are invested in the general account of the insurance company. The contract owner鈥檚 performance on those premiums is determined by interest credits based in part on any positive change in the index during the crediting period, typically 12 or 24 months.鈥�
How do FIAs protect my client's retirement savings from loss?
Another common misperception is that if the benchmark index goes down in a given year, the FIA contract owner will have a negative return. In fact, they will simply have a zero return. With fixed indexed annuities, the consumer can鈥檛 lose their principal to market downturns.
鈥淭he policyowner鈥檚 premiums are held to a zero-return floor.鈥�
- Rod Mim, Senior Vice President of National Sales, 麻豆传媒
Fixed indexed annuities come in many models and can provide solutions for a wide variety of retirement issues when used as part of a well-diversified portfolio. Each year, the customer is credited with a set percentage, known as the participation rate, of any stock market gain. For example, if the participation rate is 50 percent and the S&P 500庐 increases by 14 percent, the customer would receive a 7 percent credit for that year. Meanwhile, the risk of a market drop is transferred to the insurance company, and the principal is guaranteed to be protected from market losses. Again, in a down year for the stock market, 鈥淭hey would be credited with zero return 鈥� but nothing lower than zero 鈥� for that time period.鈥�
Why should my client consider a FIA?
Because FIAs are insulated from market volatility, it may be easier for someone to handle some market downturns, knowing they will eventually benefit from market gains. 鈥淥ften the guarantees can provide someone the confidence to keep their money in the annuity during both up and down markets,鈥� says Mims.
Fixed indexed annuities have several features that can be valuable for individuals, couples, families, legacies and more. Clients, with help from you, can select features such as
- Guaranteed fixed-rate accounts
- Guaranteed death benefits
- A minimum interest credit rate
- Guaranteed liquidity features
- Guaranteed lifetime income streams
What are your clients鈥� long-term goals?
As in all retirement planning, one size doesn鈥檛 fit all. When considering FIAs for a retirement portfolio, financial professionals need to fully understand their clients鈥� goals, level of accumulated assets and other sources of guaranteed lifetime income, such as Social Security benefits, pensions, real estate income or income from other assets. Financial professionals need to consider the client鈥檚 projected income tax bracket for the year they expect to take money out of the contract. If the client wants to be able to withdraw funds prior to age 59 陆, financial professionals need to consider the impact of any tax or other penalties.
Understanding what FIAs offer can help clients retire with confidence.
鈥淚f one has the benefit of a time horizon of at least five years or greater, the concept of time-value of money can be a powerful driver of performance and thus, the opportunity for better return performance of the annuity,鈥�
- Rod Mim, Senior Vice President of National Sales, 麻豆传媒
Risk-averse individuals may reap higher returns over the long term if they allocate a portion of their portfolios to fixed indexed annuities rather than bonds or CDs. In addition, risk-averse consumers, after securing their basic retirement needs with lifetime income streams, may feel freer to consider a wider range of options for the remainder of their portfolios.
Financial professionals may need support to fully understand and explain the features and benefits of FIAs to their clients. It can be helpful to partner with insurance carriers who offer consumer-focused educational materials and other resources to help answer their questions.
This information is brought to you by 麻豆传媒 鈥� where innovative annuity solutions are powered by unconventional thinking.
