Like all annuities, the fixed index annuity (FIA) guarantees a predictable income either for life or a set period of time agreed to in the contract. Unlike traditional annuities, which provide a predetermined payout, a fixed index annuity works by tying a portion of the customer’s savings to an investment index, such as the S&P 500. If the value of the stocks on the index increases, your savings will increase as well, up to a specified cap. FIAs usually have specified minimums as well, so your payout won’t drop below a certain minimum level.
FIAs differ from variable annuities, in which your funds are directly invested in securities. FIAs are only tied to an index, not invested in them, so a person selling FIAs does not need a securities sales license or FINRA registration.
Like all annuities, FIAs present some risk. Your money will be tied up for the length of the contract and you won’t be able to access it without incurring huge penalties. FIAs also have significant fees. If you are not sure you’ll be in a financial position to keep your money in an annuity for the duration of the contract, you might want to explore other options.
FIAs do offer some advantages, though. The IRI study participants cited the following five factors that could further drive sales of FIAs:
- Higher interest rates;
- A worry that lifetime income benefits might be less generous in the coming future;
- Lifetime income benefits similar to those from variable annuities;
- Persistent low interest rates; and
- Principle protection along with some upside potential.
It may seem paradoxical that study participants cited both higher rates of interest as well as persistent low interest rates; however, FIAs could help buyers in two different situations:
“In a persistent low interest rate environment, sales are boosted by the product being an attractive alternative to low interest products such as CDs. As rates rise, index options become less expensive and FIAs are able to provide more upside potential, making the product more attractive from a growth standpoint,” reads the IRI survey report.
For consumers, the most important thing is that their principle is safe. The FIA promises fixed income, giving them a bond-like return without some of the interest rate risk associated with a bond.