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5 common questions clients have about fixed indexed annuities

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Fixed indexed annuities (FIAs) can play an important role in your clients’ retirement plans by offering growth potential, protection from loss due to market downturns and the option for guaranteed lifetime income. Yet many clients may be less familiar with annuities in general — and FIAs in particular — than with savings tools like mutual funds or 401(k)s. Since FIAs have features of both principal protection and growth potential, they can seem more complicated than they actually are.

Here are the answers to five questions clients commonly ask about FIAs, so you can help them better understand how these products work and the benefits annuities can bring to their retirement portfolios.

1. How can a FIA help my retirement savings grow?

The opportunity to build retirement savings is a feature of FIAs that many clients find appealing. You can describe how FIAs offer the potential for interest credits that are tied to the performance of a stock market index — without having to invest directly in the market. If the index rises, they may receive a portion of that increase in the form of interest credits. If it declines, they may receive zero percent interest credits. 

What’s more, the growth within a FIA is not taxed until it’s withdrawn, similar to retirement savings vehicles such as 401(k)s and non-Roth IRAs.

2. Why won't I benefit from all of the index gain?

This is a trade off: Clients may be willing to accept some limits on their growth potential in exchange for protection from loss due to market downturns.

3. What happens if the markets go down?

Since your clients’ money is never invested directly in the market, they’re able to pursue growth potential without sacrificing security. Even during a market downturn, their savings are protected from market loss. Plus, FIAs lock in previous interest gains and those credits cannot be lost due to market volatility.

4. How do I use a FIA to help pay retirement expenses?

An important feature of many FIAs is providing a guaranteed stream of income in retirement, helping your client to be better prepared for both planned and unexpected expenses. Adding annuities to a retirement income plan can help build a retirement “paycheck” that won’t fluctuate — unlike withdrawals from investments whose value rises and falls with the market.

5. Where does a FIA fit in my overall retirement plan?

FIAs can help meet a number of your clients’ needs, depending on their current mix of financial products, goals and retirement timeline. Consider touching on these major benefits:

  • Accelerating retirement savings: Unlike 401(k)s and IRAs, FIAs have no contribution limits for non-qualified premium. This feature may be appealing to older clients looking to boost retirement savings, or to those who have maxed out annual 401(k) and IRA contributions.
  • Protection against longevity risk: Depending on the annuity, clients may include an income rider, sometimes for an additional fee. The rider can be used to provide a source of guaranteed income that can last for the rest of their lives.
  • Tax management: Unlike withdrawals from 401(k)s and IRAs, which are fully taxable (except Roth IRAs), clients only pay taxes on the interest earned in their FIA for non-qualified premium. Because the income from a FIA can be made up of a combination of interest and the return of the client’s original premium, only a portion of it may be taxable. This feature can help clients use FIA income in conjunction with fully taxable withdrawals from other sources to help lower their overall tax burden in retirement.

Take the time to answer key FIA questions to help boost your clients’ confidence and reveal the important role these savings solutions can play in helping secure their financial future.

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Withdrawals and surrender of taxable amounts are subject to ordinary income tax, and except under certain circumstances, will be subject to an IRS penalty if taken prior to age 59½.

Under current tax law, the Internal Revenue Code already provides tax deferral to qualified money, so there is no additional tax benefit obtained by funding a qualified contract, such as an IRA, with an annuity; consider the other benefits provided by an annuity, such as lifetime income and a Death Benefit.

Any information regarding taxation contained herein is based on our understanding of current tax law, which is subject to change and differing interpretations. This information should not be relied on as tax, legal or financial advice and cannot be used by any taxpayer for the purposes of avoiding penalties under the Internal Revenue Code. We recommend that taxpayers consult with their professional tax and legal advisors for applicability to their personal circumstances.

Guarantees provided by annuities are subject to the financial strength and claims paying ability of the issuing insurance company.

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. 

Deductions from rider fees and or strategy charges could exceed interest credited to the contract, which could result in a loss of principal.

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