Risk is a very sensitive topic when it comes to investing. As the saying goes, “the higher the risk, the higher the return.” As the US stock market continues through this rolling correction, investors’ appetites for risk may be waning and many may be now desiring the best of both words: principal protection with upside participation.
Many insurance companies have created new invest-ments to help accomplish those two objectives, called Fixed Index Annuities (FIA). Often presented as no-fee investments that provide principal protection and upside participation that is linked to a specific index, these investments may offer the above-mentioned benefits but may also present other risks to the investor.
Under the hood of these investments are very complicated return crediting methods which, depending on the method, could greatly affect your long-term returns. Some common crediting methods to inquire about include: Cap Rate (maximum gain credited to you regardless of index performance), Participation Rate (maximum percent of gain credited to you), Spread (minimum fee paid to company first), and Surrender Period.
The Surrender Period is the length of years that you must hold your money for the investment and can range from 5-10+ years. If you need your money before the surrender period is over, you may be subject to penalties and fees just to get your money back.
Fixed Indexed Annuities may be suitable as a small portion of an ultra-conservative investor’s total portfolio, but it is extremely important to review the crediting methods, index(s), and surrender periods to fully understand if these can help you reach your long-term financial goals.