All signs point to the possibility that fixed indexed annuities may once again be poised to become the hottest product in guaranteed lifetime income planning.
In general, fixed indexed annuities provide protection against loss of principal while pegging growth to a major index, such as the S&P 500. Clients tend to like the idea of participating in market gains while also protecting their principal and locking in a stream of income during retirement. However, indexed annuity sales have faltered in recent years due to the attention the DOL and other regulatory bodies have given to these products, which have historically been sold on a commission basis.
With the demise of the old DOL fiduciary rule and other emerging rules, however, it looks like fixed indexed annuities might be making a comeback—meaning that advisors may once again find themselves fielding questions about new developments in this product area.
Fixed Indexed Annuity Trend: Need to Know Product Information
Unlike directly investing in the equity markets, fixed indexed annuities offer principal protection in exchange for limitations on the potential for investment gains. However simple that initially sounds, these products usually contain complex features that the client will have to evaluate. When purchasing the annuity, one of the most important choices for the client is the interest crediting method, which essentially determines the way interest is credited to the account value.
The annual point-to-point interest crediting method is a popular option because of its simplicity—the beginning index value is compared to the ending index value on the annuity’s (annual) anniversary date, and the percentage of change is calculated. If the ending value is higher, the client generally receives interest, and if it is lower, no interest will be credited.
Often, fixed indexed annuities also include a cap or a spread. A cap, as the name suggests, serves to cap the client’s credited interest at the cap amount (i.e., if the index gained 10 percent and the cap is 6 percent, 6 percent will be credited, but if the gain was 1 percent, the client would receive the 1 percent credit because it is less than the cap amount). A spread is subtracted from the value of the gain—so if the index gained 10 percent and the spread was 5 percent, the account would be credited with 5 percent interest. If the index gained only 1 percent, no interest would be credited because the spread is greater than the gain.