Explaining Fixed Indexed Annuities (FIAs)

A fixed indexed annuity (FIA) is designed to offer something many retirement savers are looking for: the opportunity to grow savings over time while helping protect against market downturns. By linking interest credits to the performance of a stock market index, FIAs provide growth potential without directly investing money in the stock market itself.

Like any financial product, a FIA has its own features, benefits, and considerations. Understanding how it works can help investors determine whether it aligns with their retirement goals and overall financial strategy.

What Is a Fixed Indexed Annuity?

This type of annuity gets its name from two of its defining features. The word "fixed" refers to the way the contract credits interest and protects against negative index performance, while "index" refers to the market index used to calculate interest credits.

Rather than investing directly in stocks or mutual funds, a fixed indexed annuity uses the performance of a market index as a benchmark for calculating interest. When the index performs well, contract owners have the opportunity to earn interest without actually owning the underlying investments. On the other hand, if the index has a negative year, they don't lose money because of that decline.

This structure is what sets a fixed indexed annuity apart from many other financial products. Unlike variable annuities, a fixed indexed annuity is not directly invested in the stock market. It combines the potential for interest tied to market performance with downside protection against market risk, making it a popular choice for people seeking long-term growth and stability.

A fixed indexed annuity is one type of deferred annuity, meaning it is designed to accumulate value before income payments begin.

How Does a Fixed Indexed Annuity Work?

When you purchase a fixed indexed annuity, you make either a lump-sum premium payment or a series of payments, depending on the annuity contract. The insurance company then uses the performance of one or more stock market indices to determine how much interest may be credited to your annuity.

Your money is not invested directly in the index, which is appealing if you want to protect your principal during retirement years. Instead, the underlying stock market index serves as a benchmark. If the index performs well during the crediting period, your annuity may earn interest based on that performance. The amount credited depends on the contract's crediting method, and many fixed index annuities use caps or participation rates to determine how much interest is credited.

For example, suppose the selected index gains 8% during the crediting period. If your annuity has a 5% cap, the maximum interest credited would be 5%, even though the index gained more. If your annuity instead has a 50% participation rate, it would be credited 4% interest, or 50% of the index’s gain.

If the selected index return is negative, your annuity generally will not lose value because of that decline. Any interest credited to the annuity grows tax-deferred* until it is withdrawn, allowing your savings to continue growing until you begin taking distributions.

Why Do People Buy Fixed Indexed Annuities?

People choose fixed index annuities for different reasons, depending on their financial goals and retirement plans. While no single financial product is right for everyone, FIAs can offer a combination of features that appeal to those seeking growth potential along with protection from market losses.

• Predictability in retirement: FIAs can help make retirement planning more predictable by balancing growth potential, protection from negative index performance, and optional lifetime income features.
• Protection from market losses: Because premiums are not directly invested in the stock market, negative index performance generally doesn't result in a loss of principal.
• Growth potential without direct market exposure: FIAs offer the opportunity to earn interest tied to an index performance, without purchasing stocks or mutual funds.
• Guaranteed income options: Many fixed index annuities offer guaranteed lifetime income options, although the features and payout choices vary by contract.
• Tax-deferred accumulation: Interest credited to the annuity isn't taxed until it is withdrawn, which may allow your retirement savings to accumulate more efficiently over time.

Who Might Consider This Type of Annuity?

A fixed indexed annuity may be appropriate for people seeking a balance between growth potential and protection as they prepare for or live through retirement. While everyone's financial situation is different, a FIA may be worth considering if you are:

• Approaching retirement and looking to reduce your exposure to market volatility while continuing to grow your retirement savings.
• Concerned about market downturns and looking for greater stability without giving up the opportunity for growth.
• Looking to diversify your retirement assets by adding an insurance product that is linked to a market index as opposed to being directly invested in the market.
• Interested in guaranteed lifetime income as part of a broader retirement income strategy.

You may want to consider a fixed indexed annuity if these characteristics align with your retirement goals. The best way to determine whether a FIA fits your financial goals is to evaluate your retirement objectives, time horizon, liquidity needs, and risk tolerance with a financial professional.

Pros and Cons of Fixed Indexed Annuities

Like any financial product, FIAs offer advantages as well as potential tradeoffs. Understanding both can help you decide whether this type of fixed annuity fits your retirement goals, financial needs, and comfort with risk.

Potential Advantages

• Protection from negative index performance. One of the primary benefits of a fixed indexed annuity is principal protection from market downturns. While your annuity's interest may be affected by the performance one or more selected market indices, negative index performance generally won't reduce your annuity's value.
• Growth potential tied to market indices. Unlike a traditional fixed annuity, a fixed indexed annuity offers the opportunity to earn interest based on the performance of one or more market indices. Although returns are typically limited by features such as caps or participation rates, this approach can provide greater growth potential than a fixed interest rate alone.
• Tax-deferred growth. Interest credited to a fixed indexed annuity grows tax-deferred, meaning you don't pay taxes on those earnings until you begin making withdrawals. This can allow your retirement savings to continue growing over time.
• Income and beneficiary options. Many fixed index annuities offer guaranteed lifetime income options, helping create a reliable stream of income in retirement. Depending on the contract, they may also include beneficiary options that allow remaining contract value to pass to your loved ones.
• Growth is typically limited. While a fixed indexed annuity offers growth potential, it generally won't receive the full return of the underlying market index. Crediting methods such as caps and participation rates determine how much interest your annuity earns.
• Withdrawal restrictions may apply. Fixed index annuities are designed for long-term retirement savings. Withdrawals above the amount allowed by the contract during the surrender charge period may be subject to surrender charges and other adjustments.
• Long-term commitment. A fixed indexed annuity is generally best suited for money you don't expect to need in the near future. Before purchasing one, it's important to consider your liquidity needs and overall retirement timeline.
• Features vary by contract and by company. Not all fixed index annuities are the same. Available indices, crediting methods, income options, fees, and other features vary by insurance company and contract, making it important to review the details carefully before purchasing.

Potential Tradeoffs

• Growth is typically limited. While a fixed indexed annuity offers growth potential, it generally won't receive the full return of the underlying market index. Crediting methods such as caps and participation rates determine how much interest your annuity earns.
• Withdrawal restrictions may apply. Fixed index annuities are designed for long-term retirement savings. Withdrawals above the amount allowed by the contract during the surrender charge period may be subject to surrender charges and other adjustments.
• Long-term commitment. A fixed indexed annuity is generally best suited for money you don't expect to need in the near future. Before purchasing one, it's important to consider your liquidity needs and overall retirement timeline.
• Features vary by contract and by company. Not all fixed index annuities are the same. Available indices, crediting methods, income options, fees, and other features vary by insurance company and contract, making it important to review the details carefully before purchasing.

Is a Fixed Indexed Annuity Right for You?

A fixed indexed annuity can be a valuable part of a retirement strategy, but it isn't the right solution for everyone. The best choice depends on your financial goals, time horizon, liquidity needs, and comfort with risk. Taking the time to understand how a fixed indexed annuity works and discussing your options with a financial professional can help you determine whether it may align with your long-term retirement objectives.

For those exploring annuity solutions, Axonic Insurance offers both Multi-Year Guaranteed Annuities (MYGAs) and Fixed Indexed Annuities (FIAs) designed to help address different retirement goals. Whether you're seeking the predictable growth of a MYGA or the growth potential and protection from negative index performance offered by a FIA, your financial professional can help determine which option best aligns with your needs.

Frequently Asked Questions About Fixed Index Annuities

Is my money invested directly in the stock market?

No. Your premium is paid to the issuing insurance company and is not directly invested in stocks, mutual funds, or the market index. Instead, the index serves as a benchmark for calculating how much interest may be credited to your annuity.

Can I lose money if the market declines?

A market decline generally will not reduce your annuity's value because your money is not directly invested in the market. However, if the linked index has a negative rate of return during a crediting period, your annuity may be credited little or no interest for that period.

Can I access my money if I need it?

Yes, but withdrawals may be subject to contract terms. Many fixed index annuities allow penalty-free withdrawals up to a specified amount each year, while larger withdrawals during the surrender charge period may result in surrender charges, tax consequences, or other adjustments.

Will I receive the full return of the index?

Not usually. Most fixed index annuities use crediting methods such as caps or participation rates to determine how much interest is credited. These features allow the annuity to provide growth potential while helping protect against negative index performance.

How is a fixed indexed annuity product different from a fixed annuity?

A traditional fixed annuity credits a declared interest rate set by the insurance company. A fixed indexed annuity credits interest based on the performance of a selected market index, offering greater growth potential while still protecting against negative index performance.

*Tax-deferred means taxes are not paid on interest earned until the money is withdrawn.

This material is for informational or educational purposes only and not intended to provide legal, tax or investment advice.

Guarantees are based on the financial strength and claims-paying ability of the issuing insurance company.

Interest credited under indexed interest options may be affected by participation rates and/or caps. These elements are determined by the insurer and may change at any time.

Annuities are designed for long-term accumulation of money; surrender charges, adjustments and fees may apply on early withdrawals. Annuity withdrawals are subject to income tax, and withdrawals prior to age 59½ may also be subject to an IRS penalty.

The examples provided are hypothetical and for illustrative purposes only. They do not represent, and should not be interpreted as, predictions or guarantees of any policy's past or future performance.

Information related to tax or estate planning is not intended as tax or legal advice. A tax professional or attorney should be consulted for specific guidance.

Axonic Insurance refers to a group of affiliated legal entities organized under Axonic Insurance Holdings Inc. that collectively specialize in designing, distributing, and servicing annuity and other investment products for individuals and institutions worldwide. Axonic Insurance Services LLC (“Axonic”), an insurance producer licensed in all fifty states and the District of Columbia, #3003019286 in Arkansas, and #6013523 in California, acts as a business process outsourcer, including for the US-issued annuities underwritten by its non-affiliated carrier, AmFirst Insurance Company (NAIC #6025), an Oklahoma domiciled life insurance company with a home office in Oklahoma City, Oklahoma (“AmFirst”). AmFirst operates as AmFirst Life Insurance Company in California. AmFirst is licensed in 47 states, the District of Columbia, Puerto Rico, and the British Virgin Islands. Axonic Services LLC, a Puerto Rico limited liability company for profit, services the non US-issued annuities underwritten by its affiliated underwriter, Axonic Insurance Company SPC, a Class B(iii) insurer in the Cayman Islands licensed under the Cayman Islands Insurance Act, 2010 (as amended), as well as its non-affiliated carrier, AmFirst Life Insurance Company I.I., a corporation licensed as a Class 5 International Insurer and Segregated Assets Plan Company under Chapter 61 of the Insurance Code of Puerto Rico. Axonic has ownership interests in segregated accounts of ALIC, which provide reinsurance coverage to AmFirst and other third-party insurers.

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