Is an index annuity the best option for your client?

Your client has expressed concerns about their future. They aren’t sure if they will have enough money to last during retirement. The last thing they want to do is put all of their efforts into one area (e.g. the housing market) to watch it crash and take a huge loss. They’ve heard of retirees running out of funds and being forced to move in with their children.

Obviously that is not ideal.

Index Annuities Can Help

Fixed index annuities provide security. No matter the market conditions, the money used as premium will never decrease in value. FIAs also give the policyholder the potential of earning more interest than a traditional fixed rate annuity product.

An indexed annuity—like all other annuities—is an agreement between a consumer and an insurance company which states the consumer will pay for an annuity and the insurance company will pay the consumer money, with interest, in return.

The growth of an index annuity is tied to the growth of various stock market indices, though the purchaser is not directly investing in the market. It’s this aspect that serves as protection from decreasing value in a downturn. Most index annuities are tied to the S&P 500, but there are other options that include the Dow Jones, Nasdaq, Russell 2000, or certain European indices and commodities (e.g. gold). Regardless of the chosen index, if the market an annuity is based on tanks, the owner of said annuity won’t lose their funds.

How much interest a client can earn in a policy year is dependent on the policy’s rates and caps.

But once the client earns interest, those gains become locked in for as long as the client owns the policy. This is called the “annual reset.”

Furthermore, index annuities give clients the choice to spread their money out or allocate the funds in various options, all at the same time. This strategy allows for maximizing interest despite the consequences of the market.


Let’s take a look at an example of how annual reset can benefit the client:

Client X uses $100,000 as premium for an annuity and their annual cap is 5.00%.

At the time of purchase, the index the annuity is tied to is at 1,000 points. On the first policy anniversary, the index has risen to 1,040. With that 4% growth rate, the client’s annuity grows to $104,000. In the second year, the market decreases to 950 points, a -8.65% rate of return. Still, the client’s annuity value remains at $104,000. Client X didn’t lose value even though the market did.

Finally, in the third year, the index grows from 950 to 980—a positive 3.15%. Client X’s cap is at 5%, s/he will get all of that growth still in his/her policy.

  Change in Index Annuity Value
At purchase N/A $100,000
End of Year 1 4.00% $104,000
End of Year 2 -8.65% $104,000
End of Year 3 3.15% $107,276

A dip in performance won’t lower interest rates or stop the upward movement of the annuity’s value.

Index annuities have more potential than fixed annuities. Since the client is not directly invested in the stock market, the indexed annuity provides protection against “market corrections.”

In yet another bonus, the interest income is also tax-deferred. Earnings aren’t taxed until they are removed.

For more information, call us at (800) 823-4852 or email [email protected].