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The Good and Bad Points of Fixed Indexed Annuities

written by: ShawnTe•edited by: Donna Cosmato•updated: 8/18/2010

A fixed indexed annuity is the PR makeover name for the equity-indexed annuity. The pros and cons of fixed indexed annuities are many, - which side comes out on top?

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    Fixed indexed or equity-indexed annuities have come under fire in recent years causing insurance companies to start calling them fixed indexed annuities. In particular, the Securities and Exchange Commission (SEC) attempted to step in starting January 12, 2011 to regulate fixed indexed annuities as securities. The pros and cons of fixed indexed annuities sparked this SEC attempt and these same pros and cons should be taken into consideration before investing in fixed indexed annuities.

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    The Cons

    Three of the biggest cons or drawbacks of fixed indexed annuities are the ones not clearly defined or discussed with investors at the time of signing. Fixed indexed annuities are complicated to understand. Seniors especially fall victim to sales persons who do not fully disclose critical aspects about this investment. This is something that the SEC hoped to regulate on and after January 12, 2011 with Rule 151A. However, on July 13, 2010 the United States Court of Appeals overturned Rule 151A, which means each state's insurance department regulates fixed indexed annuities.

    A fixed indexed annuity can tie your money up for 15 to 20 years. Meaning your money is untouchable until the term has come up. In addition, insurance companies will place a cap on the amount of returns you receive. This means that you will not receive all of the money your investment actually earned. In addition, should you die, your beneficiaries will need to pay income taxes on any appreciation. These cons are why investment media such as The Motley Fool do not advocate investing in annuities, especially fixed indexed annuities.

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    The Pros of Fixed Indexed Annuities

    If you invest in a fixed indexed annuity, you will receive a higher return than if you invested in a standard fixed annuity. You are guaranteed a minimum return even if the market is in dire straights. Another pro of fixed indexed annuities is you can participate in the stock market and its gains without the risk of losing all of your money.

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    Who Would Benefit Most From Fixed Indexed Annuities?

    The follow types of people are most likely to benefit from investing in a fixed indexed annuity:

    • People who are at least 15 years away from retirement, meaning if you are not close to retirement age.
    • Want a guaranteed income for the rest of their lives.
    • Have no need to dip into your investment before age 59 1/2.
    • If you want the experience of stock market without risking it all.
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    When speaking to an insurance agent or broker dealer about fixed indexed annuities, read the contract and ask questions. Specifically, ask for the pros and cons of fixed indexed annuities. If the agent only mentions the pros of the fixed indexed annuity, request to see the terms including fees and how long the term will be for.

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    Sources

    Lysiak, F. (2010, May 17). US Sales of Equity-Indexed Annuities Drop 4% in First Quarter. Retrieved May 17, 2010, from Insurancenewsnet.com: http://insurancenewsnet.com/article.aspx?id=190996&type=newswires

    Pierce, S. (2009). How Do Annuities Work? Retrieved May 13, 2010, from Life123: http://www.life123.com/career-money/investing/annuity/how-annuities-work.shtml

    Securities and Exchange Commission. (2009). Final Rule: Indexed Annuities and Certain Other Insurance Contracts. Retrieved May 17, 2010, from Securities and Exchange Commission: http://www.sec.gov/rules/final/2009/33-8996.pdf

    The Motley Fool. (n.d.). Annuities: What's to Like? Retrieved May 16, 2010, from The Motley Fool: http://www.fool.com/retirement/annuities/annuities.htm

Understanding Annuities

Understanding the retirement product called annuities. Learn the difference between annuities and bank cds; are annuities safe investments; the pros and cons of fixed annuities; along with the strengths and weaknesses of variable annuities.
  1. Retirement Options: Annuities Vs.CDs
  2. The Good and Bad Points of Fixed Indexed Annuities