Fixed Index Annuity vs Variable Annuity
Growth for Example: Fixed Index Annuities or Variable Annuities?
At their core, both are contracts with a life insurance company for a certain period.
Now Let’s Look At Some Key Differences And How A SAF Fixed Index Annity Works Best
For You Too Have
Unique Features and Benefits You Get with These Annuities:
- Contractually has Guarantees
- Tax-Advantaged Growth and Accumulation
- Lifetime Income Options
1. Not Directly Market Investments
More secure than the variable annuity, a fixed indexed annuity is strictly an insurance product. In an indexed annuity, your money earns interest based on an underlying financial benchmark to which the annuity contract is linked.
The insurance carrier allocates your investment premium dollars in a secure mix of underlying mostly low-risk fixed-income assets and investments to fully support your objectives, typically of growth and protection.
Most carrier insuring the investments, put the remaining funds into call options on specific underlying index benchmarks.
*Note: For many indexed annuities, the underlying benchmark is the S&P 500®, however other indices such as the NASDAQ®, or the Dow Jones Industrial® or others could be used. Again please understand for clarification, fixed annuities do not directly participate in any financial markets.
However with SAF you always have other index options depending on the fixed index annuity product you select.
How your money earns more interest here… Is truly based on the movements of this underlying index. When the index goes up, the interest you earn will be a percent (%) of that growth. When the index goes down, as we all know that directly in the market money will go down and up, but your money including your full principal investment and all of the already credited interest earnings (also known as the “High Watermark”) are fully protected from any index not getting positive returns that are absolutely Best for You.
2. Growth Potential & Market Risk
Fixed indexed annuities benefit from the market up-swings while significantly reducing or eliminating the risk.
Although the growth advantages of the fixed indexed annuity could be great for you, there isn’t as much growth opportunity with a fixed indexed annuity. But it does allow for protection of your foundational money.
As previously shared, when the benchmark goes down, your money stays the same. The saying “Zero is Hero” comes to mind.
Summary is insurance carriers limit the growth opportunity of fixed indexed annuities with caps, participation rates and spreads.
Pays for the guaranteed protections and benefits to your beneficiary!
3. Different Treatment by the Insurance Company
Insurance companies treat fixed annuities differently from variable annuities.
An indexed annuity is often the “go-to” choice for annuity owners who want growth and accumulation protection along with their principal investment.
A really attractive benefit for people wanting both the ability to earn interest based on an index, but with full principal and already-credited growth protection.
From the insurance company’s perspective, with a fixed indexed annuity, the insurer keeps all premium in a general fund, making it a “general-account” product.
What this means to you… For upholding it’s insured obligations, the insurance company has strict capital requirements it must follow according to state insurance laws. For every dollar of premium paid into an indexed annuity policy, the insurance carrier must maintain dollar-to-dollar reserves in cash or cash-quivalent assts. Most carry significantly higher capital reserves than the minimum required.
4. Different Fee Schedules
Fixed indexed annuities tend to have less or no fees when compared to variable annuities.
The insurer incorporates the costs of doing business into the contract design (such as indexing and some growth limits on your interest-earning potential) to have low fees or zero fees at all.
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