Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
Many Individual Retirement Accounts hold flexible premium deferred fixed annuities as their funding vehicle. In addition to providing an excellent rate of return, an annuity provides a built in distribution system that will last the lifetime of the annuitant. The annuity also provides that the proceeds of the IRA can pass outside of probate and directly to a designated beneficiary.
President, Insurance Associates Agency Inc., West Chester, OH
Most IRA's are fixed annuities but not all fixed annuities are IRA's. All that this means is that a fixed annuity can be a fixed annuity. A fixed annuity as an IRA is not subject to the direct effect of market risks because the account assets are not held in separate accounts and then invested in marketable securities. Instead, an IRA is invested in high quality instruments by the carrier and the carrier assumes the risk to the IRA capital and to the rate of interest promised to you. The IRA pays interest at fixed rates.
A variation of this arrangement is an IRA that is coupled with market investments that have more upside potential for gain without becoming variable products. These are called "fixed index annuities" (FIA) that are based upon one or another of the market indexes and one of several interest and gain crediting methods. The caveat is that the IRA is guaranteed by the underwriting company (usually insurance) and invested similarly to those of most IRA annuities. In FIA accounts, the client shares in the upside potential for gain with the underwriting company and has better upside chances to earn better than the minimum performance guarantees the carriers provides for their IRA with you. This enables you to have performance that more closely matches your interest rate performance to stock and bond market performance. All insurance underwriters of IRA annuities guarantee a fixed minimum rate of return. Performance above the minimum in a FIA is credited to you when market conditions permit and you share with the carrier in these additional returns. Regardless of performance, the minimum rate of return is still owed and paid and the insurance carrier bears this risk of performance. Variable annuities, on the other hand, have no guarantee of performance and may pay nothing at all. Of course, with a greater risk in a variable annuity, performance can be stronger too but the trade off is no gain at all for the possible upside potential. Hope this explanation helps you understand that a fixed annuity can work perfectly well for an IRA.
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A variation of this arrangement is an IRA that is coupled with market investments that have more upside potential for gain without becoming variable products. These are called "fixed index annuities" (FIA) that are based upon one or another of the market indexes and one of several interest and gain crediting methods. The caveat is that the IRA is guaranteed by the underwriting company (usually insurance) and invested similarly to those of most IRA annuities. In FIA accounts, the client shares in the upside potential for gain with the underwriting company and has better upside chances to earn better than the minimum performance guarantees the carriers provides for their IRA with you. This enables you to have performance that more closely matches your interest rate performance to stock and bond market performance. All insurance underwriters of IRA annuities guarantee a fixed minimum rate of return. Performance above the minimum in a FIA is credited to you when market conditions permit and you share with the carrier in these additional returns. Regardless of performance, the minimum rate of return is still owed and paid and the insurance carrier bears this risk of performance. Variable annuities, on the other hand, have no guarantee of performance and may pay nothing at all. Of course, with a greater risk in a variable annuity, performance can be stronger too but the trade off is no gain at all for the possible upside potential. Hope this explanation helps you understand that a fixed annuity can work perfectly well for an IRA.