The opportunity inside Fixed Indexed Annuities (FIAs) has not been this attractive in well over 10 years. We may currently be in the best FIA market since the insurance product was first created.
FIAs are not new. They were created in 1995 and have done nothing but grow ever since. If you are not familiar with FIAs or need a refresher please click here.
My Dad came across FIAs in 1995 and has been using them ever since. His initial thought when he first learned about FIAs was, “why would I recommend a mutual fund or variable annuity that risks a client’s principal when you can get a FIA that provides 95% of the market upside with no risk of principal” That’s right, the first FIA from Keyport Life offered 95% of the gain of the SP500 on the upside and zero participation on the downside. At this point you’re thinking “this is too good to be true”. Well, turns out it was too good and Keyport did not offer that very long. However, the FIA was born and other companies started to come out with their own version.
Today’s FIA offers a variety of options to link your interest rate to a stock market index such as the SP500. Participation rates are closer to 50% rather than 95%. For example, if the SP500 went up 20% and you participated in 50%, you’d receive 10% interest. There are additional ways to calculate your interest such as cap rate. If you have a cap rate of 13% and the SP500 went up 20% you’d receive 13% interest. Participation rates and cap rates represent the maximum amount of interest you can earn. The floor or the least amount of interest you can earn is zero. How can they do this? I will be making a video to explain how Fixed Indexed Annuities work.
Below is a chart to show how a 13% annual cap rate would have performed since 1995.
The questions you should be asking yourself are: why have I never heard of this? How is this possible? Who offers these? Should I have money in an FIA?
These are all good questions and the point of this blog is to get you asking these questions and interested in learning more about FIAs. If you want to discuss FIAs further I have included a link below to book a time with me.
Lastly, let me quantify my statement from before of “We may currently be in the best FIA market since the insurance product was first created.” If you read the link to the article above it explains what caused the creation of FIAs. Some bullet points from that article:
- The bond market massacre of 1994, where federal interest rates ratcheted up 1.5% in one year caused massive flux with cautious investors.
- The interest rate on the 10 year treasury bond increased by 2.15% in 2022
- The markets were experiencing wild swings
- The SP500 was down 19.64% in 2022
History has a way of repeating itself. The opportunity in FIAs right now is obvious but this will not last forever. Interest rates inside FIAs are partially based on interest rates inside the bond market. We just saw one of the biggest interest rate rises in history. Even though I do believe rates will continue to rise no one has a crystal ball. What I do know is FIA sales for 2022 are projected to be $76 billion and I expect that number to be significantly higher in 2023.
Don’t let this opportunity pass you by.
Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have
substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity. Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated. A fixed annuity is intended for retirement or other long-term needs. It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. A fixed or indexed annuity is not a registered security or stock market investment and does not directly participate in any stock or equity investments or index.
Investment Advisory Services offered through Spyrnal Wealth Management, LLC. Insurance products and services are offered through Timothy J. Spyrnal. Snowbird Retirement does not render legal or tax advice. Be sure to consult with a qualified tax and/or legal adviser regarding the best options for your circumstances. Any comments regarding safe and secure investments, and guaranteed income streams refer only to fixed insurance products. They do not refer, in any way to securities or investment advisory products. Insurance and Annuity product guarantees are subject to the claims-paying ability of the issuing company and are not offered by Spyrnal Wealth Management.
The foregoing content reflects the opinion of Snowbird Retirement. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.