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Fixed Indexed Annuities

Fixed indexed annuity industry wide sales amounted to $30.1 billion in 2009. (1) Eighty percent of boomers want lower volitility and will accept lower returns vs. an investment that puts their money at risk. (2)

What is a fixed indexed annuity?

A traditional fixed annuity is based on a fixed interest rate. The fixed interest rate is declared at the time the annuity is issued and then reset each anniversary of the annuity by the insurer and the new delared rate runs until the next anniversary and so on. However, some contracts can be locked in regarding the interest rate for time spans such as five years.

The fixed indexed annuity is the same as the traditional fixed annuity except other options are available regarding measuring returns. That is, within a fixed indexed annuity the fixed interest rate option still exists however the return can also be based on the changes in specific indexes such as the Standard and Poors 500 index (S&P 500 index) or other indexes such as the Nasdaq or Financial Times index (FTSE). Many insurers allow you to pick and chose amounts allocated to the several indexes offered as well as allocations to the fixed interest rate option.

Capped returns and zero return floor

The change in a particular index can be measured by several different methods and over varying time periods. Regardless of the method or time period chosen a "cap" will be set at the time of issue and on each subsequent anniversary. The "cap" is the maximum credited change in the index. For instance, the cap might be set at 7%. Hence if the change in the index is +11% the maximum you would be credited is 7%. If the change in the index is 5% you would receive the 5% as it does not exceed the 7% cap in this example.

A zero return floor also exists. The zero return floor is protection against a decline in an index. Basically if an index as measured has a negative change, say -10%, then the zero floor kicks in and your return becomes zero (0%). Hence any down side risk is negated by the zero floor. Of course as mentioned above, up side gains are capped.

The zero floor means principle can not erode while the annuity is deferred/accumulation status.

Do fixed indexed annuities have long surrender charge schedules? Do you have access to the principle?

At the advent of fixed index annuities circa 1995 the surrender schedules were ten years and longer. Today the schedules vary but can be as short as 5 years. Moreover, today there are multiple accesses to the value of the annuity that do not require surrender or surrender charges. Penalty free withdrawal provisions (10% per year) are common, as well as loans, and full accumulation value at death not subject to surrender change is common.

Do sign on bonus exist?

Sign on bonus do exist although not available from all insurers and not available on all contracts. The bonus is generally 5 to 10% of the initial deposit. However, some contracts make the bonus available for as many as the first five contract years meaning any deposits received during the first five contract years qualify for the bonus percentage.

Bonuses generally become part of the principle amount and are then subject to the zero floor meaning principle can not erode.

What is ratcheting?

Ratcheting is the procedure of locking in return and the value of the return becoming part of the principle and subject to the zero floor. That is, returns become part of principle and can not erode. For example, the particular return method and particular length of time the contract specifies for the measurement occurs and your return for example is 6%. The 6% return is then added to principle and the 6% return now being part of principle can not erode.

Ratcheting is in essence a reset. That is, if external indexes create a -10% return the zero floor kicks in and the return is set at 0%. Furthermore the negative index return one year does not need made up as the return for the particular year is set at zero percent. Hence you are not faced with having a return in a subsequent year in excess of 10% to make up for the -10% performance. The ratcheting means the particular anniversary measurement date is set anew and performance for the next anniversary measurement period is not dependent of a prior measurement period.

Can annuities be non-qualified as well as qualified?

Annuities can be tax deferred annuities in the non-qualified world. For example, you transfer money from a certificate of deposit to an annuity. The money then accumulates tax deferred (no current tax applied to the gains while the annuity is in tax deferred status).

Annuities can also fund tax qualified items such as IRA, IRA rollovers, simplified employee pension plans and super IRA's.

Can you add rider or enhancements to a fixed indexed annuity?

Riders and enhancements are available. Some insurers offer long term care riders and income accumulation riders that compound the principle at a specified interest rate. Other enhancements are available depending upon the insurer.

Do you have to annuitize the product to receive the benefits?

No. Annuitization is merely one avenue of receiving benefits. Fixed indexed annuities offer multiple ways of accessing the values without annuitization. Annuitization is an option as well as lump sum access and life time withdrawal streams that are not annuitization streams.


Fixed indexed annuities are insurance contracts that offer tax deferral, a death benefit, and retirement income with returns based on external market indexes without directly participating in the market. No erosion of principle/preservation of principle is the hallmark feature.

As with any financial product one needs to consult their own financial advisor regarding suitability.


(1) The Allianz Reclaiming the Future Study Executive Summary, Allianz Life Insurance Company of North America, 2010, page 3.