All Things Annuities Deferred Annuities

Fixed Index Annuity (FIA) – Are Index Annuities a Good Investment?

Fixed Index Annuity overview
Equity Index Annuity Overview

Fixed Index Annuities are also known as “Equity Index Annuity,” “Index Annuity”, or “Bonus Annuity.”


Growth

Unlike fixed annuities the interest you could earn is not guaranteed and varies each year. Interest is determined by the crediting method(s) that was either selected at purchase and each renewal term thereafter. 

What Is A Crediting Method?

Crediting methods consist of four components:

  1. Indexes
  2. Crediting Strategy
  3. Crediting Limitations
  4. Crediting terms

Learn more about crediting methods here.

Although market indexes are used to determine how much interest you could earn, it’s important to note that you are NOT directly invested in the market. Instead, insurance companies simply use indexes to track how much they will credit you on your next interest crediting date. 

The upside is that since you’re not directly invested in the market, you’re sheltered from market volatility. 


Needless to say the growth aspect on Fixed Index Annuities are complicated and not very exciting but if you’re insistent then I’ve got you covered


Annuity Premium Bonus

Also known as “Bonus Annuities.”

Premium bonuses mostly apply to Fixed Index Annuity Products. Still, as referenced in my previous post, a handful of Fixed Annuities and even some Variable Annuities offer these.

Bonus Annuity, Bonus Annuities, Premium Bonuses

What is a Premium Bonus?

A premium bonus is when the insurance company credits the contract value a certain percentage of the premium(s) paid into the contract.

Think about a time when you reviewed company benefits from a future employer. For example, one of the benefits many job seekers review is the company’s 401k match. Premium Bonuses work similarly to that, except that it is usually a one-time credit.

A 401k match is the amount your employer will contribute to your 401k in addition to your 401k contributions.


XYZ Insurance Company offers a 20% Premium Bonus on one of their Fixed Index Annuity Products.

If you purchased this annuity with a premium amount of $100,000 your contract value would receive an “up-front” credit of $20,000.

Bonus Annuity Contracts – Items to consider

Although the contract value immediately reflects the bonus credited, most premium bonuses follow a vesting schedule. Therefore, you must own the contract for a certain amount of time before the bonus is officially yours to keep.

The insurance company will take the unvested amount back if the contract is surrendered before the bonus fully vests. This is also known as a “Bonus Recapture Fee.”

Some Bonus Annuities claim they do not have a bonus recapture fee, usually because they’ve already wrapped it into the surrender charge.  


Another item to consider is that premium Bonuses often affect the growth strategy of annuities and the surrender schedule.

For example, a Fixed Index Annuity with no bonus will likely have higher cap rates (higher earning potential) and smaller surrender fees with a shorter surrender schedule.

In contrast, a Fixed Index Bonus Annuity offers lower cap rates (lower earning potential) and longer surrender schedules.

Annual Fees

Like Fixed Annuities, annual fees on Fixed Index Annuities are rare unless a rider is added. It is, however, worth noting that you should keep an eye out for any “strategy fees.”

Again, strategy fees are rare, but they exist on a handful of Fixed Index Annuities.


Insurance Aspects

  • Death Benefit: Like Fixed Annuities, the “standard” death benefit for Fixed Index Annuities is the contract value, plus pro-rated interest, less any pro-rated annual fees (if applicable). A few Fixed Index Annuities currently on the market offer the income benefit base value as a death benefit, but the proceeds must be taken over five years and not as a lump sum.
  • Income Benefit: Most Index Annuity products require Annuitization for the guaranteed income stream unless an income rider is added, but a few have built-in Living Benefit Riders at no extra cost.
  • Available Riders: Death Benefit Rider, Living Benefit Rider (Income Rider), LTC Rider, and Liquidity Rider.

Surrender Costs

  • Surrender Schedule: Surrender schedules for FIAs can range anywhere from as low as 5 years to even as high as 18 years! Daunting to say the least.

*Fixed Index Annuities that have a surrender schedule longer than 10 years oftentimes have a premium bonus associated.

*Surrender schedules that carry fees higher than 12% is a sign that the bonus recapture fee is wrapped into the surrender fees.

  • Market Value Adjustment (MVA): As referenced in my previous post, MVAs are more common on Fixed Index Annuities. As a reminder, this figure can be a positive number which can potentially help offset the applicable surrender charge or it can be a negative number which adds to your total cost to surrender. 
  • Bonus Recapture: Earlier, we discussed how premium bonuses are generally on a vesting schedule. To recap, the company will take back the unvested amount if the contract is surrendered before the bonus is fully vested. This is in addition to other applicable charges (For example, Surrender fee, Market Value Adjustment, etc.)


Disclaimer: The opinions expressed in this blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security, investment, or insurance product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice.


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