Index Annuity

23 Oct

When the markets are volatile and the interest rates low, investors turn to relative safer investment options such as an index annuity. Let us quickly try to understand the term and what are the advantages and disadvantages of investing in this kind of an investment vehicle. An Index annuity is an investment vehicle which is closely linked to some leading index such as the S&P 500. If the stocks rise then investors benefit from the rise in stock prices. If the stock markets fall, investors are safeguarded against the falling stocks which assure a minimum return of 3%.

This is the biggest advantage of an index annuity. While on one hand an investor gains from rising stocks a falling market does not erode the base capital and still ensures a small return. Financial institutions which have annuity products make their money from the spreads. In a rising market they make more profits than what is passed down to the investor. The profits so accrued during a bull market are used to compensate investors during a bear phase.

The index annuity is a relatively newer product in the annuity space. Earlier annuity products only varied around variable equities and fixed annuities which invested the funds in secure investment vehicles.  Index annuities are good investment vehicles for investors who have a long term investment horizon. Of all the products that are offered by annuity companies the investments have a lengthy time frame (5 years or more).  So if an investor is ready to invest for a long term then index annuities can be a good bet.  There are features such as the “annual reset” rate which is used to lock-in the rate of interest.  In other words the financial institution which is issuing the annuity product has a cap on the interest rates in times of bull phases.

The index annuity is an investment vehicle which is good for investor who have moderate to high risk appetite.  There may be instances when an equity market may go for a prolonged “bear” phase. In these kind of scenarios the returns that are generated from the equity will be consistently low over a period of time.  Investors who have sudden requirement of funds may want to withdraw the investments that have been already made into an index annuity fund. The investor may have to pay charges for early withdrawal. Before buying an index annuity an investor should be aware of all the features of the product before taking the plunge.

Companies selling index annuities will offer features which may not be significantly different. However, when buying a product an investor should look for features which suit their individual requirements.  Representatives may try to hard-sell a product but as investors we need to take informed decisions.  An index annuity product may be a good fit for a young investor who wants to invest in for securing financial needs after retirement.  Of other annuity products available in the market,  an index annuity can give good returns in the long-term. So, do your study before you make the choice. Get help from an experienced retirement advisor who can help you compare several offerings.

But the current timing makes the index annuity a particularly opportune retirement option because if the market jumps from these low levels, you share in the gain yet you have protection of your principal if the market slumps.  Select a very solid insurance company, rated AA or AAA by Standard and Poors.

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