Fixed Equity Indexed Annuities (FEIA)

I) Fixed Equity Indexed Annuities (FEIA): “Building a Better Mousetrap”

Everyone would like their investments to have a High Rate of Return, Safety of Princiapl, and Liquidity. In actual practice, you must give up one of these to get the other two. For example: a bank savings account has Safety ofPrincipal (FDIC) and Liquidity, but as we have all experienced, the Rate of Return is very low. Thus, your savings account sacrifices Rate of Return to receive Safety and Liquidity.

Secondly, when choosing between investments to meet your goals, you must consider the effect of fees, commissions, and taxes on your Rate of Return, Safety, and Liquidity. For example: you may save yourself commissions on a no load fund, but you might pay higher management fees during your holding period. A no load mutual fund has Liquidity, but the redemption may have either capital gains or ordinary income tax consequences or a bit of both. As a mutual fund, there is Risk to your Principal during the Holding Period.

On their own, each of the above factors is neither good nor bad, but a potential issue when choosing an investment. Your understanding of these factors will help you make better decisions when choosing between different investments.

Building a Better Investment: FEIA’sWhat if we could build our own Long Term Investment within the real scope of what we discussed above? What benefits would we hope to start with?

1) Safety of Principal

2) Fair Rate of Return

3) Liquidity

4) No Commissions and Fees

5) Tax Deferred

6) Available for 401k’s, IRA’s Roth’s, and Non-Qualified Investors

Like our thoughts above, we are not likely to have all of these objectives at the same time, However, FEIA’s can have all of these to some degree. 

1) Safety of Principal: principal is “guaranteed” by the insurance company. Additionally, any gains credited to the FEIA will also be “guaranteed” against loss.

2) Fair Rate of Return: Potential growth is linked to the icreases of various indices like the S&P Index. Although there are limits to how much of the growth of the Index is credited, you will not participate in any of the losses.(#1 above).

3) Liquidity: FEIA’s have surrender charges that are identified on the policy’s Face Page which reduces liquidity. However, most FEIA’s have surrender charge free withdrawals each year of up to 10%. Knowing about your specific surrender charges will enable you to avoid them by investing in the FEIA’s that are suitable for your timeline.

4) No Commissions or Fees: 100% of your invested dollars are credited to your FEIA’s Account Value. and there are no management fees charged against your Account Value. Thus, if there is a gain in any policy year, there will be no reductions due to commissions and fees.

5) Tax Deferred: FEIA’s by definition are tax deferred and with properly identified beneficiaries avoids probate expense as well. It is sometimes mentioned that it is duplication to put a tax deferred FEIA’s in a tax deferred IRA or 401k. Since IRA’s and 401k’s are tax deferred instruments, you would use the FEIA’s in an IRA or 401k for the other 5 major benefits.

6) As mentioned in #5 above, FEIA’s are available for 401k’s, IRA’s, Roth’s, and Non-Qualified Plans. Other than the Non-Qualified choice, the tax deferral is a duplication but the reason for its inclusion are the other benefits.

In conclusion, Fixed Equity Indexed Annuities are excellent choices for you to consider to help meet your investment needs. There are numerous versions and variations so I strongly recommend that you seek professional assistance in finding the FEIA that best meets your needs. Feel free to call our office and let’s start a conversation.

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