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Why Fixed Indexed Annuities Have Caps

Fixed indexed annuities base their interest crediting upon the return of a stock market index. Many people wonder why, in a positive stock market year, fixed indexed annuities usually credit considerably less than the index return due to caps, participation rates, spreads, or some other element of the formula used to calculate the index credit. They wonder why the caps or other formula elements are necessary.

The answer is simple: In a negative stock market year, fixed indexed annuities eliminate the effect of the loss and provide immediate, total protection of your account value. That’s incredibly valuable protection, and that means it is expensive for the carrier to provide. It is the cost of the protection provided in a down year that prevents the carrier from being able to pass through all of the index increase in an up year.

The next question consumers often ask is, “Why does the carrier reserve the right to change the cap every year?” The answer comes down to how carriers invest the money that has been entrusted to them by their customers. Carriers invest the money in a combination of bonds and option contracts. These option contracts can only be affordably purchased for one-year durations, and their prices can change dramatically from year to year. So, carriers sometimes need to change the caps in future years as the prices of the options they purchase change.
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Keep in mind that fixed indexed annuities are not designed nor are they intended to replicate stock market returns. They are more comparable to other safer vehicles, such as bonds, CDs, and money market instruments. They are designed to offer consumers guarantees of principal yet also the possibility of higher potential interest credits than these traditional fixed interest rate products. Compared to that group of products, fixed indexed annuities offer very attractive potential returns.
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  • Are We Hurtling Toward Another Market Crash?
  • Billionaires Dumping Stocks, Economist Knows Why
  • Safeguard Your Retirement Income
  • An Explanation of the Legal Reserve System
  • Annuities Appeal to the Middle Class
  • Understanding Annuity Liquidity Features
  • The Role of Annuities in Estate Planning
  • Why Fixed Indexed Annuities Have Caps
  • Study Finds Fixed Indexed Annuity Returns Attractive and Consistent
  • Understanding How Annuities are Treated Under the Tax Code
  • How a Fixed Indexed Annuity Works and Why Your Money is Safe
  • Where Annuities Fit in Your Financial Planning
  • Why Annuity Sales are Booming During the Recession
  • The Increasing Popularity of Fixed Indexed Annuities
  • The Reasons to Consider a Fixed Indexed Annuity
  • Why People Buy Immediate Annuities
  • Why People Buy Fixed Annuities
  • Retiring in the 21st Century: What It Takes
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​Bob Lindquist
Phone: 913.814.9600

bob@boblindquistkc.com
Safe Retirement Strategies
​
8900 Indian Creek Parkway
​Building 6 Suite 250

Overland Park, KS 66210

*Guarantees provided by annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank or the FDIC. Guaranteed lifetime income available through annuitization or the purchase of an optional lifetime income rider, a benefit for which an annual premium is charged.

This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation.

​Licensed Insurance Professional. Respond and learn how insurance and annuities can positively impact your retirement. This material has been provided by a licensed insurance professional for informational and educational purposes only and is not endorsed or affiliated with the Social Security Administration or any government agency. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
16045 - 2016/8/23 | Privacy Policy
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