Understanding Fixed Equity Indexed Annuities
Fixed equity indexed annuities (FEIAs) are popular financial products that combine the benefits of fixed annuities with the growth potential of equity markets. They offer a unique way to grow your retirement savings while providing a safety net against market downturns. The way returns are credited in an FEIA is crucial, especially during market fluctuations, as it influences the overall performance of your investment.
Types of Crediting Methods in FEIAs
FEIAs typically utilize several crediting methods. These include the annual point-to-point method, monthly sum, and high water mark, among others. Each method calculates interest credits differently based on the market index performance and can affect your overall returns.
Annual Point-to-Point Method
This common method measures the change in the index from the beginning to the end of the contract year. During a market downturn, if the index value is lower at the end of the year compared to the beginning, this method might yield little to no crediting. However, since the principal is protected, the investor does not lose the accumulated value of the annuity itself.
Monthly Sum Method
In this method, returns are determined by adding the monthly changes in the index. A downturn can cause months with significant negative index returns to offset positive months, potentially resulting in zero or minimal returns for the year. This method’s vulnerability during volatile markets makes it less ideal for conservative investors during downturns.
High Water Mark Method
This method looks at the highest index value reached during the contract term and calculates the interest based on this point. In a declining market, it might still offer attractive returns if there was a peak early on. However, frequent market downturns mean the high point might not be significantly higher than the starting point, affecting potential gains.
Navigating Market Downturns with FEIAs
The strength of an FEIA lies in its ability to protect the principal from loss, despite how the market performs. While the returns may not be as high as during a bull market, the assurance of not losing original investment capital offers peace of mind. Advisors often recommend maintaining a diversified portfolio to manage the risks, even when investing in FEIAs.
By understanding how each crediting method works, investors can choose options that best align with their risk tolerance and financial goals, especially when navigating uncertain market conditions.
