How fixed indexed annuities protect clients against downside risk
This content is categorized as:Investing directly in the market exposes investors to both volatility and market risk. This uncertainty can make it difficult to create a reliable retirement income plan.
In seeking solutions that can help build savings for the future, your clients may look for one that provides growth potential while protecting their assets from loss during a market downturn. Fortunately, adding a fixed indexed annuity (FIA) to a retirement strategy can help bring growth opportunities and protection from market loss to your client鈥檚 retirement income plan.
Growth and protection with FIAs
A FIA is not invested directly in the market. Instead, it tracks market indices, allowing some exposure to market gains while safeguarding funds against market downside. Because of its design, a FIA can help clients protect their savings, ride out volatile markets and manage risk.
FIAs allow clients to balance growth in expanding markets with protection in contracting ones.
How FIAs work
Fixed indexed annuities are linked to the performance of an external market index, allowing clients the potential to grow their money when markets are up and lock in gains when they decline. That unique structure means FIAs offer:
- Growth 鈥� When the markets rise, the annuity鈥檚 value can grow. Growth potential is offered through the opportunity to earn interest credits linked in part on a percentage of the upward movement of an external market index.
- Protection 鈥� Earned interest credits are locked in and cannot be lost, even if the market goes down. It鈥檚 possible to earn zero percent interest in any given interest crediting period, but a client would never earn less than zero.
Do your clients understand the ways FIAs can help protect money for retirement?
Only 34 percent of men and women surveyed have annuities in their retirement portfolio. Your clients may benefit from a FIA鈥檚 downside protection, even in uncertain market conditions.
Source: The Harris Poll, January 30 鈥� February 13, 2024.
- Guarantees - When markets decline, guarantees in the annuity, such as a FIA鈥檚 characteristic zero-return floor, provide protection from loss. In the following example, you can see how it keeps returns from going through the floor. A client pays a $100,000 premium for a FIA that鈥檚 indexed to the S&P 500庐. In one year, the index loses 40 percent in value, yet the client retains $100,000 in principal.
Principal protection: A FIA鈥檚 zero-return floor in action |
|
| Premium paid | $100,000 |
| Benchmark market index | S&P 500庐 Index |
| S&P 500庐 annual returns | 40% |
| Zero-return floor guarantee | Protection against 40% market loss |
| Interest credits earned | 0% |
| Principal retained | $100,0000 |
This hypothetical example is for informational purposes only and is not indicative of past, nor intended to predict, future performance of any specific annuity product or interest crediting method.
Learn more here 鈥� What are fixed indexed annuities?
FIA growth versus the S&P 500庐
This graph demonstrates how the S&P 500庐鈥檚 historical performance over 10 years compares against growth of a FIA tracking the same index.
Though the amount of interest a client can earn with a FIA typically fluctuates depending on the specific terms of the annuity contract, performance can be more stable than in the underlying index. This stability provides growth opportunities without the risk of loss due to market downturns.
Locking in gains provides dependable growth without market loss
Premium that is allocated to one of the Index Strategies can receive interest that is calculated in reference to the upward movement, if any, of an external market index, modified by limitations such as a Cap Rate, an Annual Spread, or Participation Rate. This hypothetical example is for informational purposes only and is not indicative of past, nor intended to predict future performance of any specific product including an annuity; nor is it intended to represent any particular product or interest crediting method. The annual cap limits interest credits to 4% each term. Fixed and indexed annuities are not stock market investments and do not directly participate in any stock or equity investments. Market indices may not include dividends paid on the underlying stocks, and therefore may not reflect the total return of the underlying stocks. Clients who purchase indexed annuities are not directly investing in a stock market index.
Addressing potential client questions
Periods of market volatility can create anxiety about the economy and financial stability. This FAQ could help you address some questions clients may have in uncertain conditions:
Q. Are fixed indexed annuities safe in a recession?
A. Fixed indexed annuities do not directly participate in the stock market. When elected, guaranteed lifetime income options, such as annuitization or income riders, can provide stable income payments that aren鈥檛 affected by market volatility. Although, excess withdrawals can reduce the income amount. This stability, even during uncertain economic conditions, may be comforting for retirees or people getting close to retirement.
Q. Can a fixed indexed annuity lose money if the market drops?
A. A FIA provides certain guarantees by design despite market conditions. With its zero-return floor, it鈥檚 possible for clients to earn zero percent if the market falls during an interest crediting period. On the other hand, they can鈥檛 earn less than zero. Their principal and any previous earnings are protected.
Q. What happens to annuities when the stock market falls?
A. Clients who purchase a FIA are not buying shares of any stock or index fund, because fixed indexed annuities don鈥檛 directly participate in any stock, equity or bond investments. That helps protect a client鈥檚 annuity principal and any earned interest, which do not lose value in market downturns.
Q. What mechanism allows indexed fixed annuities to provide downside protection against market downturns?
A. A FIA鈥檚 rate cap and/or participation rate help control exposure to market risk. Both limit a client鈥檚 returns in their own ways. But in return for lower returns, the carrier assumes the risk. The compromise for potentially lower returns over time is more stability, because clients鈥� principal and any earnings are protected from loss in declining markets.
Q. What happens to an annuity if the dollar loses value?
A. FIAs are guaranteed insurance contracts the carrier would honor, even if the dollar loses value. The amount of a client鈥檚 annuity payment would stay the same with less purchasing power because of inflation.
Securing a client鈥檚 financial future
Markets can be unpredictable, but your clients鈥� financial future doesn鈥檛 have to be. You can help by explaining how a FIA could help:
- stabilize their portfolio now
- protect money for retirement
- provide greater financial security in the future
Planning for a secure retirement requires a personalized approach. 鈥淭hat鈥檚 why it is important for financial professionals and their clients to consider retirement savings vehicles that can provide growth and protection 鈥�,鈥� suggests Mike Downing, Chief Operating Officer at 狼窝导航. 鈥淎 FIA can help do that.鈥�
Talk with your clients about the ways a FIA may help stabilize their portfolio and offer financial security in retirement.
Insights on 狼窝导航 Connect. Tips, tools and resources to grow your business by helping clients retire with confidence.
Indexed annuities are not stock market investments and do not directly participate in any stock or equity investments. Market indices may not include dividends paid on the underlying stocks, and therefore may not reflect the total return of the underlying stocks; neither an index nor any market-indexed annuity is comparable to a direct investment in the equity markets.
Although fixed indexed annuities offer principal protection from market downturns, the deduction of applicable charges could exceed any interest credited, resulting in the loss of principal.
