Are Indexed Annuities Safe during a Recession

What are Indexed Annuities?

Indexed annuities are essentially the inverse of life insurance policies. In life insurance the providing company promises large lump sum coverage in return for scheduled smaller premium payment. In annuities, the company instead receives a large lump sum in the beginning and promises to maintain the principal to be re-paid upon the death of the covered person, called an annuitant. The company makes these transactions attractive by offering interest on that principal during this time of holding, called the elimination period. This is where the “indexed” title comes into play. The interest on the annuity, like interest on cash value, can be generated by applying a fixed, set rate per period. This would be a fixed annuity. The interest can also be credited via values tied to securities. In an annuity like this, also known as a variable annuity, the principal can no longer be guaranteed, as the growth or decline of the fund rest entirely on the performance of the security. A indexing strategy rest squarely in the middle of these methods. The interest is credited based on how the indices of the major markets perform, but not directly invested in one. This provides a substantial bump in performance ability, while maintaining the principal guarantee. Many of these companies even offer initial bonuses, sometimes as high as 10% of initial contribution, to better position their product among competitors. Because of these unique features, we typically only recommend index annuities here at Bay Life.

How do I know if an annuity is right for me?

An annuity, like any other financial instrument, is only suitable depending on the risk tolerance and needs of the consumer. Those who would like a guarantee for their hard earned money, with the potential for moderate interest growth, seem to be the sweet spot market for this product. Although traditionally used more for retirees, these attributes now appeal more widely among all age groups considering the unstable financial climate of 2023. To find this product suitable, you have to understand what your giving up. In return for the security of your money is the long term surrendering (6-12 years) of it. This is enforceable by penalties and fees levied by the issuing company until the elimination period is up. This lack of liquidity can clearly present a problem for those who reasonably believe they would need to use their money in the near term.

Can an annuity offer lifetime payments?

You may have heard the marketing of financial products that provide lifetime payment in retirement. This is no scam, these are annuities! Annuities all provide what is commonly referred to as a income rider. These riders offer a plan with a sub-account that compounds over the surrender period with a high, guaranteed, interest rate that adds to the initial premium. After the surrender period the annuitant can begin receiving payments or begin a new contract. Once the payments do begin, they will represent a proportion of the entire account value to be paid out monthly to the annuitant in perpetuity. This means that even after all of the account value has been paid out, payments will continue until the death of the annuitant. This can be a great option for those that are concerned about the risk of outliving their savings in retirement. If the annuitant happens to meet an untimely death, all of the account value at the time will be paid out immediately to the beneficiary.