Fixed Indexed Annuities Hit New Sales Record

A recent report shows that sales of Fixed Indexed Annuities reached record levels during the second quarter of 2009. According to the report, total sales of Fixed Indexed Annuities reached $8.3 Billion. This $8.3 Billion surpassed the previous record, set in the second quarter of 2005, by nearly $800 Million. While the record is impressive on its on, the fact that the record came at a time when Annuity Carriers were attempting to decrease the amount of new sales by cutting premium bonuses, reducing commissions, and placing moratoriums on the amount of new business.

The fact is, despite the efforts of the annuity industry to decrease new annuity sales, many people are seeking a “flight to safety”. Over the past 12 months, there has been a huge decrease in the values of Amercian portfolios. As the United States Equity Markets experienced record levels of volatility, many people saw their retirement savings and other investments decrease dramatically. The sad truth of this problem is that a large percentage of the recorded losses came directly from the portfolios of Baby Boomers.

While the Baby Boomer generation may not ever reach “break even” on their investment losses suffered during the crash, it is apparent that they are not willing to take a chance on losing more. So why is the destination of the “flight to safety” Fixed Indexed Annuities? To those who understand the Fixed Indexed Annuity, that answer is very simple. The problem is that many people simply do not understand this product.

The Fixed Indexed Annuity, simply stated, is Fixed Insurance Product that guarantees the owner (or annuitant) that his or her principle (amount given to the insurance company) will never decrease (lose value). In addition, the annuity can increase in value if the performance of an Equity Index (most commonly the S&P 500) performs favorably during your contract. While there are hundreds of different Indexed Annuity products that calculate earnings in a multitude of ways, the theory remains the same. You may be asking yourself, “what’s the catch?” The catch is that in exchange for the Insurance Carrier providing a guarantee of your principle and giving you the possibility of earning market linked returns, the Insurance Carrier wants time and a percentage of the earnings.

The fact is, most Fixed Indexed Annuity products have Surrender Periods of 5-12 years. If you decide to take your money out of the contract during this Surrender Period, the Insurance Company will charge you a fee (called a Surrender Charge). This Surrender Period allows the Insurance Carrier to take your principle and make long term investments. The other caveat with the Fixed Indexed Annuity is that the Insurance Carrier also retains a portion of the contracts earnings. Simply stated, they take out the possibility of loss but also limit the upside earnings. To understand this concept, let’s look at an example:

A person places $100,000 into a Fixed Annuity Contract with XYZ Carrier. On the date the contract is issued, the S&P 500 Value was 900.00. 12 Months later, the S&P 500 Value was 1,080.00. That is a 20{66506b27ca8f5234034d808fc0aabc14bc16ceb45d71027974b073b60f711cfe} increase in the underlying Index. At the contract anniversary, the Insurance Carrier credits the Indexed Annuity with a $15,000 (15{66506b27ca8f5234034d808fc0aabc14bc16ceb45d71027974b073b60f711cfe} increase). The remaining difference is retained by the carrier.

As you can hopefully see, the Fixed Indexed Annuity offers two important benefits to those who choose them. First, they provide the contract owner 0{66506b27ca8f5234034d808fc0aabc14bc16ceb45d71027974b073b60f711cfe} chance of loss. Second, they offer the contact owner with an opportunity to earn higher returns than the average Fixed Annuity of Certificate of Deposit. There are other benefits of the Fixed Indexed Annuity that we have not discussed, but you can see why so many people are turning to the Fixed Indexed Annuity as the destination of choice for the “flight to safety”.

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