The accounting scandals and subsequent collapse of a number of large corporations in the previous decade shook the investors' confidence in traditional financial market investment.
Millions of Americans lost their precious savings amounting in billions due to default of such big firms as Enron, Lehman Brothers, AIG, and various others.
As a result, most investors were in a bearish mood and were unwilling to expose their savings further to traditional stock and bond market investment.
That is when Fixed Indexed Annuity (FIA) came to prominence as a safer alternative to traditional financial investment.
Salient Features of Fixed Indexed Annuities The FIAs are ideal for people who are nearing retirement.
FIAs, in essence, work like a social security or 401k plan.
They provide reliable periodic payments all the while guaranteeing the principal amount.
Although Fixed Indexed Annuities were first introduced in 1996, they have gained prominence fairly recently.
The reason for their popularity lies with the fact that FIAs offer benefits of stocks, bonds, and 401k investment instruments.
These benefits include: • Guaranteed Principal Protection • Higher Returns Linked to Stocks • Tax Deferral Similar to bonds and annuities, FIAs promise protection of principal over the tenure of the investment.
The FIAs provide higher returns as compared to annuities as the returns are linked to performance of a specified stock market index.
Moreover, the returns on the FIAs are tax deferred.
IRS does not tax the returns until you take them out from the FIA account.
Inner Workings of FIAs Explained FIAs are issued by insurance companies, which are also responsible for backing the annuity guarantees.
Investors called annuitant enters into the FIA contract with the insurance companies.
Insurance companies price the FIAs based on the life expectancy of the investor.
The returns of FIAs are linked to certain stock market indexes.
The FIA companies, however, set a maximum and minimum cap on the returns.
They set a minimum income guarantee (MIG) and the maximum income payout (MIP) that will be paid out regardless of performance of the linked stock.
For example, if the MIG and MIP cap on a particular stock market index is set to 3% and 8%, you will get returns in that range only.
Penalty for Premature Withdrawal FIAs were deigned to serve as a long-term investment option to help investors save and increase their retirement savings.
That is why the FIA issuing companies charge a certain fee for early withdrawal of the investment.
Normally, if people decide to draw out their investments before reaching 59 ½ years, they are charged a fee of around 10% of the drawn amount.
The reason for early withdrawal penalty is to discourage investors from drawing their amount prematurely and thereby hurting the potential of periodic payment that is paid out during retirement.
Final Verdict! Fixed Indexed Annuities have emerged as the most popular financial instrument for investors who are risk averse and want a guaranteed return on their investment.
The increasing demand for low risk investment instruments has fueled popularity of these FIAs.
They are ideal for investors to secure their retirement savings and provide a guaranteed lifetime income that prove invaluable during their retirement phase.