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The importance of education about fixed indexed annuities

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Lifespans have increased over the years and, on average, the time spent in retirement is becoming even longer for many Americans. Your clients may be in search of solutions that provide an income stream for their later years, but also offers a balance of protection and growth potential. A fixed indexed annuity (FIA) can be a beneficial supplement to your clients’ savings portfolio by offering a guaranteed monthly retirement paycheck, protection from market volatility and opportunities for accumulation.

Even though FIAs can solve for a diversity of financial retirement needs, many financial professionals still have questions about how these products work and their role in a retirement savings plan. Consequently, they may never have considered recommending one. But as the annuity market continues to evolve and create more diversified products, it's crucial that financial professionals educate themselves about FIAs — and in turn help educate their clients — to determine whether one is the right fit for a given client's needs.

Here are some essential elements of FIAs that financial professionals should understand, followed by important concepts to explain to your clients.

Key topics for you

1. Differences in FIA design

While all FIAs offer no direct downside market risk to your principal, they pursue that strategy in many ways. Study the differences in performance for FIAs that track a broad market index, like the S&P 500®, versus those that track alternative or specialty indices. Likewise, understand how interest rate crediting strategies, such as caps and participation rates, affect how much of an index's growth is translated into value for the annuity contract holder.

2. Options to meet specific planning goals

One product will not suit every client need. Learn how certain product designs — such as an FIA that tracks a multi-asset balanced index — can add diversification to clients' retirement savings. Likewise, familiarize yourself with riders that offer additional benefits, such as inflation protection, guaranteed income, or death benefits.

3. Flexible uses for FIAs in a client's portfolio

FIAs can play several roles in a client's strategy, such as providing a future source of stable retirement income, supplementing tax-deferred savings vehicles during the accumulation phase, or filling income gaps between early retirement and when clients must begin taking required minimum distributions or delayed Social Security benefits. Studying these strategies will help you determine appropriate FIA use for various client scenarios.

Key concepts for your clients

1. The distinction between direct market investments and FIAs

Because FIAs track one or more indices, some clients may have the misperception that they're investing in the market with a FIA when they're not. Clearly differentiate FIAs from mutual funds and other investments by highlighting how FIAs simply use indices as a measuring stick for interest rate credits. This structure allows for the guarantee that FIAs won't lose money when markets decline.

2. How FIAs offer downside protection

Don't overwhelm clients with mathematical models that determine interest credits. Rather, stress the basic concept that downside protection from market losses is paid for by limiting returns when they increase in value. Once clients are comfortable with that concept, you can compare the potential value that different products offer.

3. The potential benefits of FIAs in a retirement plan

Retirees face any number of risks that can compromise their financial futures, including longevity risk, inflation and interest rate risk, and market volatility risk. Explore these risks with your clients, then explain how features of FIAs protect against them.

The popularity of FIAs is a measure of potential demand in today's retirement landscape. In this environment, it's important to match clients with the right FIA if one meets their needs and objectives. When financial professionals take the time to fully understand a product's key details and educate their clients, those clients are then in a better position to achieve their important goals.

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