Here, the National Association for Fixed Annuities (NAFA) will run a monthly Annuity Facts column, containing essential information about fixed annuity product features, regulation, tax issues, and industry news.

We invite you, the reader, to send us any questions that you often hear — or that you may have yourself. Submit your questions to ASJeditor@AgentMedia.com with the subject line “Fixed Annuity FAQ” to have your problems answered here.

To get us started, here is a quick list of the most common questions NAFA receives from the media on indexed annuities.

Q: I’ve been told that I don’t get all the gains from stock market appreciation. Fixed indexed annuities can limit the maximum percentage upward in any given year. Why?
NAFA:
Fixed indexed annuities offer the ultimate guarantee of savings protection, along with higher interest crediting potential than other safe alternatives. When looking at fixed indexed annuities, don’t just consider what happens in the years that index is up — a major part of this product’s value is what happens in the years the index is down.

Elimination of index losses is a very important safety net for retirees on a fixed income, for those with limited time to recover from market losses, or for those who simply do not want any market risk in their retirement savings. Because of the strength of their guarantees, fixed indexed annuities cannot — and are not intended to — deliver the entire upside potential of the market index.

Q: Why don’t fixed indexed annuities include the dividend income of the underlying index?
NAFA:
Again: Because of the strength of their guarantees, fixed indexed annuities cannot and are not intended to deliver the entire upside potential of the market index. While annuities could credit some portion of the index price increase and dividend, it has become customary within the annuity industry to exclude the dividends and offer a higher portion of the index price increase.

Over a period of many years of market index increases and decreases, it is entirely possible for a fixed indexed annuity to provide a higher overall return than the market index itself — even when dividends are included. This is because in years that the index declines, fixed indexed annuity owners do not lose any money, while in years that the index increases, fixed indexed annuities credit a portion of the index price increase. This can be an attractive combination for many consumers.

Q: I’ve been told that fixed indexed annuities have significant charges if I take my money early, and these charges can last for a long time.
NAFA:
If you look around the financial services industry, you will come to realize that there is no product that combines guaranteed safety, the potential for a high interest rate, and unlimited liquidity, all in one product.

Take your bank, for example: In your checking account, you have guaranteed safety and unlimited liquidity, but little or no interest. If you want more interest but still guaranteed safety, your bank will offer you a CD, which limits your liquidity.

Since fixed indexed annuities offer guaranteed safety and the potential for a high interest rate, they have limited liquidity and should only be used for money where unlimited liquidity is not needed. But, even during the surrender charge period, most fixed indexed annuities allow free withdrawals of 10 percent of the annuity’s value each year. There is also a wide variety of surrender charge durations in the industry. Products are available with surrender charges as short as three years. Also, regardless of the surrender charge duration, about 90 percent of the products available will let you take all of your money immediately without any charge should you die, become disabled, or require extended nursing care.

About NAFA:
The National Association for Fixed Annuities (NAFA) is a national trade association exclusively dedicated to promoting the awareness and understanding of fixed annuities — including income, declared rate, market value adjusted, and indexed. NAFA is the only association whose sole purpose is advocating for fixed annuities and educating regulators, legislators, consumers, members of the media, industry personnel, and distributors about fixed annuities and their benefits to retirees and those planning retirement. NAFA’s membership consists of more than 100 carriers and independent marketing organizations (or field organizations) representing more than 200,000 agents and registered representatives selling fixed annuities. You can follow NAFA on twitter at www.twitter.com/nafausa.