As Americans age and experience more health issues, many turn to insurance products to cover their expenses. Fixed index annuities can have a significant impact in this area. If you have a limited budget or need supplemental coverage, this type of annuity can help pay for health care costs by providing you with recurring income during retirement.
Here we will define what a fixed index annuity is, discuss how it compares to other investments, and explain how it works if you're looking for supplemental income to help with future health care costs.
What Are Fixed Index Annuities?
Fixed index annuities are a type of investment vehicle sold by insurance companies that can provide principal protection and the potential to earn reasonable rates of return. Also referred to as FIAs, these products can enable you to invest your money without worrying about losing your principal investment during turbulent times in the market.
These insurance products work as long-term investments that allow your invested assets to grow on a tax-deferred basis. You may opt for a guaranteed lifetime withdrawal benefit, which provides you with a guaranteed payment to cover expenses you may face in retirement.
How Do Fixed Index Annuities Work?
Fixed index annuities are agreements between you and an insurance company to guarantee returns based on product terms and the amount of money you invest. There are many types of annuities, and what sets FIAs apart is that they can provide a range of possible returns for your money.
FIAs calculate interest by using a market index, such as the S&P 500, as a benchmark. While FIAs may track this index, they differ from investing in a regular index fund because they have a floor and a cap to their investment returns. The main benefit of the floor is that you won't lose your initial investment, even if the market bottoms out. Because of this, though, there's also a cap, which means there's a limit to the amount of interest you can earn.
Essentially, FIAs are a way to invest conservatively, especially if you have concerns about losing money in the market. While you might not see gains that are as significant as what other investment types can produce, you also wouldn't have the same risk of losing money that can come with those investments.
While FIA agreements vary from company to company, here is a general idea of what you can expect: You may begin by purchasing an FIA with a lump sum or by making several payments spread out over time. The amount you put in will affect how much your money grows and compounds, and it will also affect the amount of money you can withdraw when you reach retirement age.
Consider speaking with your insurance company or a financial professional about your financial goals and whether a fixed index annuity makes sense for you. For example, if your FIA will be your primary retirement vehicle, you'll likely need to invest more of your nest egg. However, if you use your FIA as a supplemental investment to help pay for future health-related costs, you might not require as much upfront investment.
Another benefit of FIAs is that your money grows tax-deferred, which means you won't pay taxes on your earnings until you withdraw your money from the FIA. When it's time to begin making your withdrawals, you can often choose between accepting a lump sum or receiving monthly payments spread out over several years. Most consumers select several payments to have consistent cash flow and income over time.
How Do Fixed Index Annuities Compare to Other Investments?
Unlike traditional investments, FIAs have little downside risk, and they guarantee you will not lose your initial principal no matter what happens in financial markets.
In addition, FIAs may offer better rates of return than high-yield savings accounts, CDs and money market accounts. This makes them a good place for cash reserves set aside expressly for covering future risks like rising medical costs.
Keep in mind that you can generally get better returns by investing directly in the market through stocks or mutual funds. However, investing in the market comes with inherent risk. While you could earn much more through investing than you can with a fixed index annuity, you could also lose your investments in the market during a downturn.
What Features Are Most Important?
Fixed index annuities have several features worth considering. First, you can use them to help you save for retirement income or future health care costs. You can also utilize them to save for other financial goals, such as sending your children to college.
Second, in some states, the money inside an annuity contract is protected from creditors, so someone else cannot take it if you get sued. The same can't be said for investments held in a traditional brokerage account.
Third, FIAs are tax-deferred, which means you don't have to pay taxes on your earnings until you're ready to withdraw.
How to Open an Annuity
If you want to open an annuity, find a reputable insurance company first. Some of the largest and most well-regarded insurance companies offer this product. A quick search online will yield many different options if you want to move forward with one.
To determine which company would be good to work with:
- Research their rates online.
- Learn about the types of options they offer, such as death benefits or riders.
- Speak with their representatives and get advice regarding what is best for someone with your financial goals.
Once you choose the company you want to work with, send an application. The application process is different for each company, but you can usually fill one out online. The company might need you to upload supplemental information as well. They'll send you a contract, and once that's officially opened, the insurer invests your money and you get returns on it until you decide to withdraw your funds.
Consider contacting a financial professional if you need more assistance deciding whether you should purchase a fixed index annuity and whether it will help you to meet your specific needs.
Are Fixed Index Annuities a Good Investment Choice?
It's important to remember that FIAs are insurance products first and foremost, and investment performance comes secondarily. However, an FIA can be an excellent option if you are risk-averse and want to combine one with other retirement investment products.
A fixed index annuity can also be a good idea solely to create extra income that can help you pay for health care costs in retirement. The idea of purchasing an annuity — a contract with an insurance company that guarantees specific payments for the rest of your life or some other period — may seem odd when you are in good health and have no intentions of stopping work anytime soon.
However, suppose health care costs continue to rise at their current pace. In that case, an FIA may be worth considering because it could help offset these expenses and provide lifetime income security.
Of course, before jumping in and signing a contract right away, be sure to research different companies. Learn about any fees that are involved, ask as many questions as you need to, and understand what happens if you decide to withdraw your money before retirement.
If you go into the process educated and decide an FIA is right for you, they can certainly bring peace of mind in retirement, especially when you combine them with other retirement income.