Annual Charge
As discussed earlier, some contracts have an annual charge of between 200-300 basis points and/or annual fees of 30-50 basis points. Some Fixed-Indexed Annuities do not have annual charges or fees.

Cap Rate
This is the maximum amount of gain that an insurer will credit to the annuity in a given year. Some insurers have a cap in between 10% to 15%, other insurers have no cap.

Example
Greg and Elizabeth, both age 65, decided to place $10,000 into a Fixed-Indexed Annuity. They choose a Fixed-Indexed Annuity because of their low tolerance for risk. They would rather have a percentage of the gains and none of the losses instead of 100% of the gains and 100% of the losses. The Fixed-Indexed Annuity that they choose credits earnings based on Annual Reset, no averaging, with a cap of 10%, and a participation rate of 100%. They decided on a $10,000 premium instead of the $100,000 that they were initially considering since they wanted to take baby steps and act cautiously.

In the five years that followed, the market grew and fell accordingly:

year 1: plus 12%
year 2: minus12%
year 3: plus 8%
year 4: minus 8%
year 5: plus 15%

How did Greg’s and Elizabeth’s annuity grow? In year one, their annuity credited earnings of 10% instead of the 12% gain since it had a cap of 10%. In year two, 0% was credited since the index went down and losses were ignored. In year 3, their annuity credited the entire 8% of the 8% index gain. In year four, 0% was credited because again annual losses were ignored. And, in year five, 10% of the 15% was credited.

Please note that the above example was predicated on a participation of 100%. If the participation rate had been only 65% instead of 100%, Greg’s and Elizabeth’s annuity would have credited 7.8% in year 1(65% of 12%), 0% in year 2, 5.3% in year 3(65% of 8%), 0% in year 4 and 9.75% in year 5.(65% of 15%).

What can be learned from this example? A Fixed-Indexed Annuity can be an extremely effective way for one to receive a percentage of the gains and none of the losses and a 10% cap on earnings and even a 65% participation rate can still provide a competitive way for one to accumulate more money for retirement on a tax-deferred basis.

This story is fictional and does not portray any individual(s) or company(ies) nor any anticipated performance of any specific product.