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Fixed Indexed Annuities

We’re here to explain fixed indexed annuities in easy-to-understand terms. If you have any questions about how an annuity could be beneficial for your overall retirement strategy, contact the team at Relayer Benefits Group.

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Benefits of Fixed Indexed Annuities

You may think the word “fixed” in “fixed indexed annuities” implies that this type of annuity allows for no flexibility. But in reality, a fixed indexed annuity may provide you with the opportunity to make choices for yourself.

First, one of the benefits of fixed indexed annuities is that you may be able to pick the type of index you want. Although you aren’t buying stocks or funds, you could choose an external index. Interest can grow differently based on the differences in the index you pick within your fixed indexed annuity. You could even specify how much of your annuity you want to connect with certain indexes.

Next, another benefit of fixed indexed annuities is the buyer’s choice of crediting method. When calculating the index interest of your annuity, if there is any, the insurance company abides by a certain set of rules and timeframes. For instance, a buyer can choose a monthly crediting method, or instead choose an annual crediting method. Some methods of crediting use an average value over a certain period of time, while others base their interest on the differences in rates over a period of time. Yet another choice of crediting method marks the change of the index from the first-anniversary contract date. Based on that change, the interest is calculated one year later.

What Factors Influence

Potential Interest Rates?

When you purchase your fixed indexed annuity, you have a variety of indexes you may designate to the annuity’s value. In addition, you can determine the crediting method used to track changes in your index or indexes. However, it’s important to take a look at some of the different factors that affect the way your indexed interest potential is calculated. Consider looking at these factors before choosing a crediting method.

Certain fixed indexed annuities set a limit to the amount that a contract can earn throughout a specific period, otherwise known as a CAP. The time period is normally a month or a year. If your chosen index increase rises beyond the cap, the cap is used to calculate your interest rather than the index rate.

Some fixed indexed annuities use participation rates after caps. Participation rates are used after a cap but before a spread, to measure your indexed interest rate. 

Certain fixed index annuities implement a spread to define indexed interest. A spread subtracts a percentage from the accumulations the index reaches within a certain amount of time. For instance, the annuity contract gets a credit of 5% indexed interest if an annuity spread is 5%, and the index increases by 10%. 

Crediting Method Choices

No single crediting method delivers the most interest under all market conditions. Explained below are some of the more popular crediting options. 

This method follows the fluctuations in the market index from one year to the next and credits the interest based on that annual change.

This method tracks increases and decreases throughout the month and adds them up. Their total sum determines the index interest credited to your annuity.

This method totals the individual monthly index values and divides them by 12, resulting in an average. The starting index value is then subtracted from this average to determine the result of positive or negative index change. This amount is then divided by the starting value to find the percentage of interest credited to your annuity.

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Automatic Annual Reset:

The Benefits Explained

A fixed indexed annuity commonly has this feature.  The index values of your annuity will automatically reset at the end of each year of your contract, meaning that each year’s ending value becomes the next year’s starting value. Furthermore, automatic annual rest will lock in any interest your contract earned during the year.

It’s important to note that participation rates, spreads, and caps will all also be determining factors in the calculation of indexed interest, and could potentially reduce the value of interest credited to your annuity.

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Indexed Interest Potential of Fixed Indexed Annuities

For a better understanding of the way these crediting methods work, speak to our team here at Relayer Benefits Group! We would be happy to answer all of your questions and to provide you with any additional information you may need. Give us a call today to receive more information on the benefits of fixed indexed annuities. Let’s see if they are right for you.

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