How Do You Set Up a Fixed Index Annuity? (And What Do You Get Back?)

Understanding More About Fixed Index Annuities with Income Riders

We’ve told you previously about the one key reason why people decide not to purchase a fixed index annuity with an income rider as part of their overall retirement income plan. It’s not because of surrender charges, fees, or lower returns. It’s because the benefits of a fixed index annuity with an income rider simply sound too good to be true. Of course, they’re NOT, and you can read more about that here if you need a refresher.

So, let’s assume you’re ready to move forward with your fixed index annuity with an income rider – where do you start and how, exactly, does it work? We’re here to walk you through it.

Your Quick Reminder: What is a Fixed Index Annuity with an Income Rider?

What really is a fixed index annuity with an income rider? An extremely summarized version of a definition for a fixed index annuity with an income rider could be: a contract with an insurance company that can be funded with cash (after-tax money) or IRA money, and guarantees your principal against all stock market losses regardless of severity, protects all previous and current gains against all future stock market losses, may provide guarantees on your income for as long as you live even past age 100, provides you an opportunity for a portion of index gains, provides income tax-deferred growth of all earnings, is subject to surrender charges limiting your total liquidity, limits your overall returns providing lower returns than the stock market, taxes gains as ordinary income, and carries an annual fee (in most cases) to guarantee your income for life.

SEE ALSO: Annuities 101

How to Get Started

You give a fixed index annuity company a lump sum of money by writing them a check or by transferring your account. In turn, the annuity company gives you an annuity contract which is a legally binding, written contract enforceable in a court of law.

Every single thing the insurance company promises and guarantees you are in writing in your specific annuity contract including your principal being protected against all stock market losses, your income is guaranteed for as long as you live, and all remaining assets passing on to your beneficiaries, how you access your money, the fees you pay, and how you earn interest in your account.

It’s a shame that some advisors and news sources are uneducated about fixed index annuities with income riders, but are willing to “act and talk like an expert” by making negative comments about fixed index annuities without knowing enough to fully understand them. Many times, the negative comments center around how difficult fixed index annuities with income riders are to understand, or how they are so vague. There is nothing vague about a legally binding, written contract enforceable in a court of law that states everything in writing about where you have just placed your money.

  • Your mutual fund doesn’t give you a legally binding, written contract enforceable in a court of law.
  • Your portfolio manager doesn’t give you a legally binding, written contract enforceable in a court of law.
  • Your advisor doesn’t give you a legally binding, written contract enforceable in a court of law.
  • Your brokerage account doesn’t give you a legally binding, written contract enforceable in a court of law.
  • But the insurance company providing your fixed index annuity with an income rider does. They give you a legally binding, written contract enforceable in a court of law.

Let’s talk more about that contract now.

The Specifics of Your Legally Binding, Written Contract

Think how you’d feel if you had these 14 things in a written contract given to you by the insurance company:

  1. Guarantees principal against all stock market losses
  2. Guarantees all gains against future losses
  3. Income Rider guarantees an income for life
  4. States if there are any bonuses and defines restrictions
  5. Shows how you can earn interest – a portion of gains
  6. Provides index options available to you
  7. Details how and when you can access your funds
  8. States when you can access guaranteed lifetime income
  9. Shows how guaranteed lifetime income is calculated
  10. States penalty-free withdrawal amounts and access time
  11. Clearly defines surrender charges and time period
  12. Fees are stated and guaranteed
  13. Shows the fixed guaranteed interest rate option
  14. States your beneficiaries and percentages

This probably sounds pretty good, right? How would you like to get all the promises made to you about your money in a legally binding, written contract? How would you like if all the promises made to you can be enforced in a court of law?

SEE ALSO: Why Should Retirees Avoid Volatility?

If the stock market crashes, you will not lose any money in a fixed index annuity with an income rider due to stock market losses. If the index your contract is linked to goes up, you have the opportunity to earn a portion of the gain. Once you earn a gain, the gain and original principal are both protected against future stock market Losses. You can’t take all your money out without penalty for a stated time period in your contract, but you can typically start taking out 10% of your account every year starting immediately after the first year, without any penalties.

You can potentially set up a guaranteed lifetime income to start as quickly as 30 days from when you fund your annuity contract. How would you like to deposit your funds today and know within 30 days you would start receiving monthly income that is guaranteed to be paid to you for as long as you live? Even if the stock market crashes the day after you start your contract, your account will not suffer any stock market losses and your income is guaranteed for as long as you live.

Fixed indexed annuity contracts with income riders will typically either give you the option to defer your income and receive a higher amount of income for every year you defer, or to take income immediately and have the opportunity to receive potential income increases in the future based on how your fixed index annuity performs each year.

Want a Partner in this Process? We Can Help!

If you think this kind of annuity might be a smart move for you, reach out to schedule a conversation with us. With Peak Financial Freedom Group as your partner, we can start working toward your financial freedom today.

Want more information on annuities? Check out our book, Momma’s Secret Recipe for Retirement Success.

Peak Financial Freedom Group
2520 Douglas Boulevard, Suite 110
Roseville, CA 95661


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