Editors' pick: Originally published March 2.
The Dow Jones Industrial Average is at record highs, stretching almost toward 22,000 on Monday, February 27, and financial advisors may be starting to mull over ways to protect clients if the stock market, sooner or later, reverses course in a major way.
"With the stock market seeming to reach new highs almost daily, investors face a quandary," says Ken Nuss, chief executive officer at Annuity Advantage, an online annuity market and services platform, based in Medford, Ore. "They want to profit if the market stays strong. But many, especially older Americans, also fear the market is due for a major correction."
Advisors looking for protection against such a downturn would do well to consider fixed index annuities, which now comprise 58% of the entire fixed annuity market right now, based on data from the Insured Retirement Institute.
Basically, a fixed indexed annuity is akin to a deferred annuity, which the annuitant buys with a premium deposit, Nuss explains. The annuity credits interest linked to the fluctuations of a market index, such as the Dow Jones Industrial Average or the S&P 500. Interest is credited when the index value climbs, but when it slides, the annuitant loses no money.
"These are complex contracts with many pros and cons," offers Nuss. "In exchange for a guarantee, you'll never lose any principal, you'll typically get only part of the market's gains as an interest credit."
Nuss, like plenty of other financial industry wealth managers, says there are plenty more reasons to like fixed index annuities, but only if you read the fine print, do your homework and recognize how fixed index annuities really work. For financial advisors - and their clients - who want some insurance against a big market drop, here are six key elements of fixed index annuities that warrant closer inspection: