Fixed Indexed Annuities Part 1 will be the beginning of several blogs that I will write to break down how these complex annuities work and how they can be used to benefit you or how they could hurt you.  Let me start by saying that Fixed Indexed Annuities (FIA) are new to the insurance world.  They were developed February 15, 1995 by a company called Keyport (now called Sun Life), so you can see they are not even 20 years old.  The insurance industry dates back to the Babylonian times but really wasn’t made affordable until the 1700s.  Something else that you have to know is that is FIA have a few different names that they are called.  You may have heard them called “hybrid annuity”, “ratchet annuity”, “indexed annuity”or “equity indexed annuity”, basically they are all the same thing called different names by different insurance companies.  The reason that FIA were created was to give people another option besides mutual funds and they are designed to give you better returns than other traditional fixed products like CDs, money markets and bonds.

Now lets take a look at how these work.  First you need to know that your money is never put directly in the stock market even though your growth is determined by the market.  Therefore if there is ever a pull back in the actual stock market you do not have to worry about any loss in your account.  That seems like a great feature for an investment, right?  However when you give up risk you will also give up some of the reward……maybe.

Let me explain how you can earn money in you FIA without being exposed to the market.  Generally your account is credited annually with your gains, if you have any, and then that money is yours to keep no matter what happens in the market in future years.  You gains are base off the indexes usually the S&P 500, Dow, or NASDAQ, some of the elaborate annuities will use other indexes but we will just keep it simple for now.  The insurance companies have many different way that they calculate your gains and some can be quite complicated as well, so we will wait to discuss them in a later blog. For now let just say that you will rarely get 100% of the market upswing in one year, but really that is okay because remember you do not have to take part in any of the down swing.

In true fashion the best way to explain how you earn money in a FIA would be to say that you will earn a portion of the indexes returns in the up years, and that money is yours to keep, and if the market goes down you don’t lose any money that year, you just don’t earn any.

Let me use a Blackjack table to help you get a picture of how this would work.  Lets say you sit down at the Black jack table with $100.00 and you bet all of the money on your first hand.  Unfortunately you lose, however the dealer doesn’t take any of your money, they just let it ride until the next hand.  Then on the next hand you win and the dealer is supposed to give you $100.00 but instead you only get $50.00, now you have $150 that you are betting with.  The next hand you lose and the dealer takes nothing, the following you win and the dealer instead of giving you $150.00 only gives you $75.00.  You now have $225.00 because you can never lose.  So the question is, if you can only win lets say half of the pot but you never have to lose how long would you want to sit at that Blackjack table?

To sum this blog up on FIA we have learned that our original investment is protected from loss but the future gains are not guaranteed, if the market goes up we may not see the full amount of the swing in our accounts, however what ever is added to our accounts we get to keep forever.

Please leave me a note and let me know if this helped you understand or if it just confused you more and you want to play Blackjack.