Fixed annuities have been around for decades and have been a historically popular choice due to their predictability. In short, the insurance company providers backed their fixed annuities by highly rated or investment grade bonds and offered an annually stated yield and an underlying guaranteed interest rate inside each contract. More recently, due to a low interest rate environment for bond rates, fixed annuities have become less popular.
Unlike fixed products, variable annuities invest in a variety of diversified sub-accounts. They were a favorite tool for my clients for many years, but the internal fees to maintain these contracts kept going up and up, just as we saw in the long-term care insurance market. This fee drag significantly reduced the net returns to the owner. For this reason, there’s a more limited selection of variable annuities and riders available today. However, they can still serve a purpose for specific client needs.
Fixed Index Annuities (FIA)
Fixed index annuities (FIA) are conservative financial products that are often used to protect a portion of your principal. In essence, the interest you can earn is tied to the performance of an external market index (NASDAQ. S&P 500, NYSE). When your market index goes down, the worst that can happen is you experience zero interest for that year. If the index goes higher on your contract anniversary, you can participate in a portion of the gains through index credits. These products have lower fee structures and often no management fees, but also have limits on what you can earn.