3-minute
How do indexed annuities work?
This content is categorized as:
Attractive interest rates, product innovation, and competition in the market ignited enthusiasm in recent years for two types of indexed annuities: fixed indexed annuities (FIAs) and registered index-linked annuities (RILAs). According to the , RILA sales hit a record $47 billion in 2023.
Indexed annuities can serve as useful tools in clients鈥� portfolios as they consider retirement. Once they鈥檙e in place, indexed annuities can be relatively hands off, without requiring the active management that other parts of a portfolio may require. And, facing potentially volatile market conditions, it鈥檚 important for financial professionals to help clients calibrate their growth expectations with risk mitigation.
Indexed annuities are attractive because they provide growth potential, risk protection, and don鈥檛 need active management when put in place. It鈥檚 important to help clients with the indexed annuity that鈥檚 right for them. To do so, it鈥檚 important to understand their goals, their risk tolerance, and the other factors already in play in their portfolio. Doing so can help financial professionals show them to the best product or products for them to provide lifetime income while also helping their portfolio continue to grow.
Broadly speaking, indexed annuities are insurance products that combine index-linked growth potential with a level of protection from market risk. Assets in the annuity also grow tax-deferred. Money in an indexed annuity is not directly exposed to the risks of the stock market or individual stocks. Instead, interest credits are based in part on the performance of a reference index, like the S&P 500庐. Any positive change in the index over a specified term period can result in interest credits that are applied to the annuity鈥檚 accumulated value. But there are multiple types of indexed annuities, including fixed indexed annuities and registered index-linked annuities. Here are four questions to discuss with clients when assessing whether a FIA or RILA is right for them.
Both FIAs and RILAs offer risk protection, coupled with potential growth. But one of the main differences lies in their protection from market risk.
FIAs provide 100 percent protection from loss due to market downturns. While it鈥檚 possible to earn zero percent interest, you鈥檒l never earn less than zero (keeping in mind that rider charges, for example, can reduce the accumulated value). This means that your client鈥檚 principal is protected and that even in a market downturn, a client won鈥檛 lose money. This can help provide your client peace of mind when facing a potentially turbulent market and can help clients capture growth during periods of attractive interest rates.
RILAs provide protection from a portion of market loss, usually in the form of a buffer, or floor. A 10 percent buffer shields your client from the first 10 percent of any index decline. A 10 percent floor provides protection from any decline greater than 10 percent. In both cases, the client may receive negative interest credits and risks a loss of principal. In exchange for this risk, RILAs typically offer greater growth potential in the form of higher caps or participation rates. The right product depends on your client鈥檚 goals and expectations for the annuity. It鈥檚 also important to understand the details of the annuity so your client will understand growth, risk, and income potential.
What indices do FIAs and RILAs track?
Indexed interest crediting strategies may track benchmark indices like the S&P 500庐 or custom indices designed to manage volatility risk while pursuing goals such as noncorrelation to major equity indices (most custom indices are published). It鈥檚 important for a financial professional and their clients to understand what indices the annuity is tracking. If an annuity if tracking a benchmark index, an annuity holder can review past performance (bearing in mind, of course, that past performance is not an indicator of future performance). But not all indices tracked by an annuity are public.
Indexed crediting strategies typically measure the change in index value between the start and the end of a term period. This is called a point-to-point strategy. In addition, the tracked return may include or exclude dividends (total return) or returns in excess of the risk-free rate (excess returns). Understanding how the annuity measures index returns is an important conversation to have with your client as they compare annuity products.
What is the annuity鈥檚 crediting strategy?
Indexed interest credits typically are based on a formula such as a cap (an upper limit on return), participation rate (the percentage of an index鈥檚 return credited to the annuity), or a percentage-based fee such as a spread.
For example, if the benchmark index returns 8 percent, an indexed annuity with a 4 percent cap will receive an interest credit of 4 percent; an indexed annuity with a 90 percent participation rate will receive an interest credit of 7.2 percent; and an indexed annuity with a 2 percent spread will receive 6 percent. Crediting strategies can be complex, so this is another conversation to have, especially if your client is new to annuity products.
Why annuities can be an important part of a retirement portfolio
Clients in or near retirement likely need to balance multiple goals: They want to ensure they have enough income to live comfortably in retirement while continuing to grow their nest egg. They may also want to make sure that they are building a legacy. Annuities also provide an avenue for portfolio diversification, buffering and protecting part of the portfolio from volatile market performance and helping provide financial security in retirement.
Whether it鈥檚 waking up to a new view on long-awaited travels or listening to grandkids giggle on park swings, retirement dreams are as unique as your clients 鈥� and a wide range of annuity products can help your clients find the ideal fit. Having candid conversations about the role of an annuity, including how it works and the details to look for within each product, can help clients feel confident in the annuity choices they are making for their financial futures. Incorporating indexed annuities into a retirement strategy could be an important part of a solution that helps your clients retire their way.
Insights on 麻豆传媒 Connect. Tips, tools, and resources to grow your business by helping clients retire with confidence.
For financial professional use only. Not to be used with the offer or sale of annuities.
The "S&P 500庐" is a product of S&P Dow Jones Indices LLC or its affiliates (鈥淪PDJI鈥�) and has been licensed for use by 麻豆传媒 Annuity and Life Company. Standard & Poor鈥檚庐 and S&P庐 are registered trademarks of Standard & Poor鈥檚 Financial Services LLC (鈥淪&P鈥�); Dow Jones庐 is a registered trademark of Dow Jones Trademark Holdings LLC (鈥淒ow Jones鈥�); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by 麻豆传媒 Annuity and Life Company. 麻豆传媒 Annuity and Life Company鈥檚 products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500庐.
Indexed annuities are not stock market investments and do not directly participate in any stock or equity investments. Market indices may not include dividends paid on the underlying stocks, and therefore may not reflect the total return of the underlying stocks; neither an index nor any market-indexed annuity is comparable to a direct investment in the equity markets.
Although fixed indexed annuities offer principal protection from market downturns, the deduction of applicable charges could exceed any interest credited, resulting in the loss of principal.
Registered index-linked annuities have a risk of substantial loss of principal and related earnings. They are designed to be a long-term investment product used to help provide income for retirement and are not suitable as a short-term investment.
Registered index-linked annuities can only be marketed and sold by securities licensed financial professionals. Any discussion of this product must be preceded or accompanied by the product brochure and prospectus which provides more detailed product information, including all charges or limitations as well as definitions of capitalized terms.
ATHENE ANNUITIES ARE PRODUCTS OF THE INSURANCE INDUSTRY AND NOT GUARANTEED BY ANY BANK NOR INSURED BY FDIC OR NCUA/NCUSIF. MAY LOSE VALUE. NO BANK/CREDIT UNION GUARANTEE. NOT A DEPOSIT. NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY. MAY ONLY BE OFFERED BY A LICENSED INSURANCE AGENT.
