Staying Engaged in the Market while Mitigating Risk, part 2 of 5 taken from the entire episode of Right on the Money, Conservative Investors and Savers.
Synopsis Some advisors call the S&P 500 Index the “poor investor’s portfolio,” meaning it’s easy to understand and relatively inexpensive to own. But even savvy and sophisticated investors buy the S&P 500 via mutual funds or ETFs as an anchor to their portfolio. Although the S&P 500 is a broad and diversified investment, it’s exposed to market volatility just like any equity. Bottom line? You can lose money.
Content A fixed indexed annuity associated with the S&P 500 has a zero crediting provision in the annuity to protect against losses generated in a negative market. That’s not to say a fixed indexed annuity can’t lose money. Like most financial products, fixed indexed annuities have policy expenses. So even in a zero crediting period, policy expenses are debited and could result in a loss. Also keep in mind currently fixed indexed annuities don’t participate in any dividends generated by the S&P 500, so there’s upside limitations, but with the downside risk of policy expenses. Be advised there can be two sets of rates: current company practice and contractual guarantees. Have your financial advisor go over the policy provisions before your purchase a fixed indexed annuity.
One significant feature of a non-qualified fixed indexed annuity is the policy’s earnings accumulate tax-deferred. If you’re in a high-effective tax bracket, tax deferral could be impactful over time. Speaking of time, the holding period of the fixed indexed annuity needs to correlate to your financial goals. Watch the interview on fixed indexed annuities with financial advisor and author Eric Judy, taken from talk show, Right on the Money. Eric has also co-authored The New Retirement, a Paradigm Shift.
There are basically three crediting methods to a fixed indexed annuity: spread, cap and participation. The longer the fixed indexed annuity contract period (at least 10 years or more) the likelihood all three crediting methodologies will result in the same return.
But in short five-year periods, the crediting method may matter depending on the formula used by the specific insurance company issuing the fixed indexed annuity policy.
It’s difficult to become a mortality mechanic on these products because the policy language and engagement provisions that trigger benefits can be rife with legalese and actuarial speak. That’s why it’s important to have a conversation that discusses all these talking points with your financial advisor.
Syndicated financial columnist and talk show Steve Savant interviews Eric Judy, financial adviser, best selling author and top online video blogger on Right on the Money Part 2 of 5 taken from the entire episode entitled Conservative Investors and Savers.