Learning Annuities

Fixed Annuities

Fixed Annuities are a legal description defined by Congress as a product that cannot lose your Principal investment or your annual gains once they are locked in. Fixed annuities were created before the advent of IRAs and 401Ks as a way to defer taxes on retirement accounts that were also exempt from lawsuits. In the 1990s, very large institutions like Allianz developed the Equity Indexed Annuity (EIA). Fixed products earn in direct relationship with financial markets, essentially doubling returns over non-indexed annuities.

Glossary of Terms to Control and manage your Fixed Indexed Annuity

Learning these terms is a great help in managing and operating your account.

CAPS: This is the amount you can earn with a given allocation [which index] and strategy [e.g. annual point-to-point, monthly averaging, 2-year point-to-point]

EXAMPLE: If you started annual point-to-point indexing in January 2015 and one year later it had increased by 8%. If that strategy had a “cap” of 6% then you would get the 6% credited to your account. The “cap” is the trade-off for your account never having a negative year and still beating bank interest.

SPREADS: Instead of having “caps” some have “spreads”. A “spread” is a point(s) taken from the yield so that using the above example of an 8% index yield, the client would have one point taken away making it a net gain of 7%.

ACCUMULATION ACCOUNT: This is your true account value that includes the initial premium, bonuses, and earnings since the contract’s beginning. This account is also the basis for calculating the cost of riders, surrender value, death benefit, etc. It also reflects the total initial investment plus earned interest, bonuses, etc. fewer withdrawals.

INCOME ACCOUNT: When have selected the guaranteed lifetime income rider it totals your initial investment plus bonuses, and automatic annual increases and forms the basis for determining the guaranteed lifetime withdrawal benefit.

EXAMPLE: If, after 5 years your income account has reached $100,000 and you are say 70 years old, there is a withdrawal percentage that is awarded at that age. If the withdrawal percentage is 5.5% then your minimum withdrawal for the rest of your life would be $5,500 per year.

FIXED ALLOCATION: If you do not want to index because maybe you do not think the market is going to do well you might select the “fixed rate” for all or part of your funds. That way if, indeed, the market does not do well, you still get the fixed rate rather than zero for that year.

SURRENDER VALUE: The value of your account should you need to withdraw your money before the contract’s end. If you have a 10-year contract and you want all your money back in its 6th year, you would normally have about a 4% reduction of your account value. The charge historically on a 10-year contract would begin at 10% and steadily reduce to zero in the eleventh year.


Our experience with FIXED INDEXED ANNUITIES (FIAs) is extensive and our research into new and more refined products is ongoing. Our FIA clients are very pleased with their profits in the good years and not losing a penny when the stock market is in a downturn or in “personal disaster mode.”

A study of the five years ending September 30, 2018, showed FIAs annual return was 10% higher than that of the top-selling mutual fund (source: National Underwriter, March 2, 2019).

Some basic facts about Fixed Indexed Annuities (FIAs) are

  • Annuities that provide an opportunity to earn more interest than traditional fixed annuities and other safe money options.
  • FIAs are NOT short-term investments. FIAs are for the assured growth and safety of the principal. In general, the longer the contract term the higher the annual yield.
  • Most FIAs pay full account value (no surrender charges) to your beneficiary at the time of death with no probate.

There are some FIAs that allow you to take your entire account value at the end of the contract period and some that require that you take income for a period certain (like 10 or 20 years) or a lifetime income stream. Be sure you know what you are getting. This is not the type of annuity we recommend or even show you.

FIAs with GUARANTEED LIFETIME INCOME RIDERS, can predict to the dollar even twenty years in advance, the guaranteed minimum retirement income you will receive for your lifetime, or if you choose, the lifetime of both spouses. Most of the riders have an automatic formula for increase for your benefit base.

You can start taking income right away allowing you to enjoy the increase of a 7% to 10% bonus along with a 7% increase for every year before you activate your lifetime income.

All fixed annuities are tax-deferred so you have the advantage of earning interest on money that would otherwise be paid in taxes. Earnings are taxed when they are pulled from the account.

You are not gambling on stocks, but simply investing in the overall performance of the market in general. These are reflected in indices like S&P 500, Dow Jones Industrials, and many indices provided by major banks like Chase and Barclays. You can be assured that when the market is losing money, you will not lose your money. In good years the Markets Indexes performance, in general, will indicate your earnings. You choose which indices to use to calculate your yield.

You have other options for indexing methods which usually include: monthly average, annual point-to-point, monthly point-to-point, and fixed. These options can be reset annually.

Each year you can change your index or indexing method if you want, or you can select a fixed rate if you think the market will not do well. Every year you can select the percentage of your funds that are using any given index (allocation) and the averaging strategy.

We shepherd you through the process, not just to assist you to make your investment, but through the years, we are here to explain indexing options, allotments, contract features, and the best way to maximize your income.

Things to avoid when selecting an FIA

  • Asset Management Fees
  • Low Caps & Large Spreads
  • Riders Calculated with ‘benefit base’ and charged against account value
  • Low Earned Interest During Payout Phase
  • No Walk-Away Feature
  • Uneven Distribution of Surrender Charges

Things to Look for in a FIA

  • Penalty-Free Withdrawals
  • Full Index Credits After Starting Guaranteed Lifetime Income
  • One-Year Indexing
  • Income Doublers for Disability