You don’t have to choose between growth and security.

Annuities are a contract you purchase from an insurance company to help you accumulate assets for retirement. They offer several ways to generate income, including systematic withdrawal, lifetime income payments through a guaranteed lifetime withdrawal benefit (GLWB) available at an additional cost, and annuitization; annuitization is offered at no additional cost.

A fixed indexed annuity offers returns based on the changes in a securities index, such as the S&P 500® Composite Stock Price Index. Indexed annuity contracts also offer a specified minimum below which the contract will not fall, regardless of index performance. After a period of time, the insurance company will make payments to you under the terms of your contract.

FIAs are not a “traditional” investment.

“Traditional” investments generally mean stocks and bonds.

When you invest in a stock, you are buying a small piece of the value of a publicly traded company. You may sometimes receive a share of the profits of the company in the form of a dividend or may benefit from the perceived growth of the company if you sell the stock at a profit. Because stocks are shares of a company, you may suffer losses if the perceived value of that company falls, or may even be liable for damages if that company suffers other adverse events.

When you invest in a bond, you are lending money to a company or other entity such as a federal, state, or local government, or you are purchasing a loan from someone who initially extended that loan. The bond places you “ahead” of shareholders in payment from the company, but the price of that position is often lower interest rates, particularly on highly rated bonds. For example, the 10-year Treasury Bond rate has been below 4% since April 2010.

Even with low interest rates, there is still the potential for losses in a bond. Sometimes companies go bankrupt without having assets capable of repaying bondholders, and even municipalities as large as Detroit, Michigan have declared bankruptcy.

A fixed indexed annuity is not a stock market investment and does not directly participate in a stock or equity investment. Because the principal you choose to allocate to a fixed indexed annuity does not participate directly in the markets, you are protected from market downturns.

FIAs offer:

Principal and interest rate guarantees

Your principal is protected, and interest gains are credited systematically. A downturn in the underlying index will not reduce your contract value, however withdrawing assets during a set scheduled of time may reduce your principal from fees and penalties. The surrender value of your contract could be less than the purchase payment you put into the contract, but some fixed indexed annuities offer a specified minimum value under which the surrender value will not fall.

Minimal risk exposure

A fixed indexed annuity has the potential to earn interest based on changes in an index and earn interest based on a set rate. This provides you with the opportunity to accumulate funds for retirement without exposing your savings to market risk.

Potential tax advantages

Fixed indexed annuities may offer 100% tax deferral, so all your earnings may grow tax deferred.

FIAs may be superior to cash and savings accounts.

If you’re like many people preparing seriously for retirement, you may feel uncomfortable with the volatility that is increasingly a part of traditional investments. You may be moving more and more of your savings into cash or cash equivalents like money market accounts and even savings accounts.

Many people facing retirement are feeling the pinch of historically low interest rates on these cash equivalents. Additionally, the guarantees on money market accounts and savings accounts may not be what you expect.

The federal government ended an ad hoc guarantee program for money market funds in September 2009. This means that in the event of another significant stock market event, there is the possibility of a “run” on money market funds that would cause investments to suffer losses.[1]

For savings accounts, the Federal Deposit Insurance Corporation (FDIC) insures deposits for many banks and other financial institutions. FDIC Deposit Insurance only covers the first $250,000 per account.[2] If you have more than $250,000 in a savings account and your bank should fail, the government would only pay an insurance claim on the first $250,000 of your savings.

Is a Fixed Indexed Annuity the right choice for you?

A FIA may be appropriate for individuals who want guaranteed interest rates and the potential for lifetime income. Lifetime income may be provided through the purchase of an optional rider for an additional cost or through annuitization at no additional cost.

It’s important to remember when discussing annuities that all guarantees and protections are subject to the claims-paying ability of the issuing company.

[1] http://www.marketwatch.com/story/money-market-funds-are-a-most-dangerous-investment-2013-03-29

[2] https://www.fdic.gov/deposit/deposits/brochures/Deposit%20Insurance%20at%20a%20Glance%20-%20English.pdf

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