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    Explaining a Fixed Indexed Annuity

    By Donald B. Kobrin

    I know fixed indexed annuities (FIA) are complicated products to understand. The fact remains that, over the past decade, FIAs have been one of the best programs available for many people purchasing annuities.

    In its simplicity, you are giving up liquidity (contracts generally allow you to withdraw 5 – 20 percent per year without penalty) in exchange for certain guarantees* and bonuses**. Today, the average length surrender charge periods in FIA contracts are 10 years, which means at the end of 10 years, all surrender penalties are reduced to zero.

    What makes FIAs unique are two basic factors: first, the crediting method for calculating gains. Because it is a “fixed” annuity, the buyer has an option to elect all or a portion of the account value to either a declared interest rate or of an “indexed option” which is tied to an outside index, such as the S&P 500®, but other indexes are also used.

    The simplest example is called “annual point-to-point” crediting. The two “points” are the value of the S&P 500® on the anniversary date (or when the company first receives the money) and the next anniversary date. In this hypothetical example, let’s say that 100% of your account value is allocated to an index option. Let’s say on December 20, 2010 the S&P 500® is at 1,100 and on December 19, 2011 it’s at 1,183. The gain is determined by the difference in values: 83. When divided by the start date value of 1,100 this calculates to 7.55 percent. If your account was credited to the fixed account, it would have earned 3 percent. If your account was credited to the index option, it would have earned 7.55 percent, and thereby, earned you more. The good news is that once an option gain is made, it becomes part of your account value. If the end point is less than the start point, the option for that year earns zero percent. The amount in your index option did not make any gains, but at the same time, you never lost any of your account value in the index option. This includes any gains made from the past year. You also get to reset the next year’s starting point at the lower S&P 500® starting point.

    The options purchased by your insurance company can restrict the amount of gain you make in three ways:

    1. Cap – Expressed as a percent. You get to keep everything up to the cap, but not beyond.
    2. Participation – Expressed as a percent of the gain you get to keep.
    3. Spread – Expressed as a percent or reduction between the calculated return and interest rate your account is credited with.

    Each year we try to connect with our clients, either in person or by phone, to go over these options for the next contract year.

    For the past few years, many FIAs have offered an optional “income rider” which can be purchased for additional premium. This rider allows a simultaneous account to grow at a guaranteed* rate until you activate the income. So, while the accumulation account is growing according to the chosen crediting methods, the income account is growing at a guaranteed* rate (currently up to 4 – 8%). This account value is used to determine a guaranteed* income stream for a lifetime. Most contracts also allow a continuation of an income stream for the life of the spouse.

    Still confused? Didn’t get everything you wanted in this article for total clarity? Pick up the phone and call us at 707-566-6775 to set an appointment with our office. Whether you are an existing client or not we will take the time to show you why this type of annuity may be one of the best for your financial needs.

    By contacting us you may be offered insurance and/or investment products for sale.

    *Guarantees are backed by the financial strength and claims-paying ability of the issuing company and may be subject to restrictions, limitations or early withdrawal fees. Annuities are not FDIC insured.

    **Bonus annuities may carry higher fees and charges than annuities without the bonus feature, and may not pay the bonus in case of early withdrawal.


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