Fixed Index Annuity Facts
If you're interested in a guaranteed* income stream with the potential for additional growth, you may consider adding a fixed index annuity to your portfolio. Fixed index annuities are long-term, tax-deferred† retirement vehicles that offer a unique combination of growth potential (via interest based on one or more market indexes) and the protection of optional and standard guarantees — all designed to help you pursue your long-term financial goals.
Most fixed index annuities have two phases: the accumulation phase, during which your account has the potential to grow tax-deferred, and the distribution phase (also known as annuitization), during which you receive income payments or a lump-sum payment. You also have the opportunity to leave a legacy that allows your assets to pass on to beneficiaries. Fixed index annuities' benefits and features vary widely, so it's important to work with a financial professional to choose a fixed index annuity that suits your individual objectives.
This material is intended for educational purposes and does not contain information about specific Jackson products.
*Guarantees are backed by the claims-paying ability of the issuing insurance company.
†Tax deferral offers no additional value if an annuity is used to fund a qualified plan, such as a 401(k) or IRA, and may not be available if the annuity is owned by a "non-natural person" such as a corporation or certain types of trusts.
What is an Annuity? An annuity is a long-term, tax-deferred vehicle designed for retirement. Earnings are taxable as ordinary income when distributed and may be subject to a 10% additional tax if withdrawn before
Many fixed index annuities offer a choice of indexes (such as the S&P 500®), and allow you to determine what portion of your contract will be based on each index. Although these products are tied to the performance of indexes, assets are not directly invested in stocks, bonds, mutual funds, or index funds. Furthermore, your principal will not be subject to market index risk. Your contract value won't decrease based on index volatility (subject to the claims-paying ability of the issuing company).
Once the index allocations are chosen, the issuing company uses a crediting method to track the performance of the chosen indexes. At the end of each crediting method term, the indexed interest is calculated. If the result is positive, the contract owner will automatically receive indexed interest, which is locked in and cannot be lost due to future index declines. If the result is negative, nothing happens — the value of the contract is not reduced.
There are multiple methods of calculating and crediting interest for fixed index annuities in the financial services industry. The most common of these are calculated once a year* and offer the option to credit interest based on one of the following:
- Index averages during that year
- A sum of monthly increases and decreases in the index(es)
- A comparison of the value of index(es) at one point in time to another
- A set rate of interest if the market is flat or positive
Many fixed index annuity contracts include caps (or limits) on the amount of interest you can receive. Discuss the various crediting methods with a financial professional to see if any are appropriate for you.
During the accumulation phase of a fixed index annuity contract, interest credited to your nonqualified contract is tax deferred. Most fixed index annuities have no contribution limits.
You may want to look for a fixed index annuity that offers optional lifetime income guarantees† (usually at an additional charge) to help you navigate unforeseen needs. Living benefits can guarantee a revenue stream that will last as long as you do. Other possible benefits include penalty-free required minimum distributions, extended care benefits, and terminal illness benefits.
During the distribution phase of the contract, an fixed annuity can be converted into a series of income payments for your entire lifetime, over a set time period — or one lump-sum payment. If you begin taking withdrawal payments before age 59½, your withdrawals may be subject to additional taxes.
*Wink's Sales & Market Report 4th Quarter, 2015.
†Guarantees are backed by the claims-paying ability of the issuing insurance company.
Fixed Index Annuities
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