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Are Indexed Annuities Right for Your Clients?

As your clients’ priorities evolve from outperformance to preserving retirement income, you may find that indexed annuities satisfy their changing objectives. Read this post to learn what clients will benefit best and how the indexed annuities work.

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Are Indexed Annuities Right for Your Clients?

Are Indexed Annuities Right for Your Clients?

Indexed annuities seek to provide investors with market-based returns, along with protection against the downside risk that comes with the market. They are designed to provide higher returns than what are currently available on fixed-rate annuities, without subjecting them to the full volatility of market-based investments.

Who are the Best Client Candidates for Indexed Annuities?

While many clients may be very comfortable with the fluctuations of the market, there are many others who would prefer greater predictability and stability. When reviewing your clients to determine if an indexed annuity may be right for them, you may want to look for these investor profile attributes:

  • Seeking higher returns than what is currently available through certificates of deposit, money market accounts or fixed-rate annuities
  • Has indicated a desire for more predictable returns
  • Is focused on long-term accumulation goals and seeks to do it through tax-deferred growth
  • Wishes to reduce the amount of investment income subject to current taxation
  • Is nearing retirement, or already in retirement; these clients best understand the need for capital preservation and income they can’t outlive

A Quick Review of How Indexed Annuities Work

An indexed annuity is a hybrid annuity in that their returns vary more than a fixed-rate annuity, but less than a variable annuity. The return an investor receives with an indexed annuity will depend upon the performance of the index to which it is linked, rather than any declared, guaranteed rate of return for a prescribed period.

Index annuities will differ from company to company, but they will share some basic design features, including:

  • Index-linked Return—The investor’s return may be tied to the performance of a single index (e.g., S&P 500) or a basket of indices in some predetermined allocation. Most policies do come with a guaranteed minimum rate of return.
  • Cap—Generally, a cap is placed on the amount an investor will participate in the upside potential of the index to which the annuity is linked. For instance, a cap provision may limit any 12-month return to 12 percent, even if the index returns an amount in excess of 12 percent.
  • Participation Rate—The investor will typically share in only a percentage of the index’s return, e.g., 80 percent. Thus, if an index returns 10 percent, an investor with a policy participation rate of 80 percent would be credited with an 8 percent return.

As your clients’ priorities evolve from outperformance to preserving retirement income, you may find that indexed annuities satisfy their changing objectives. An advisor, however, should compare various indexed annuity products as they may differ on investor return and protection features.

See referenced disclosure (2) (4) at http://blog.americanportfolios.com/disclosures/ 

About The Author

Keith Carravone

 

Director of Insurance Products 
631.439.4600, ext. 177 

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