Summer Savings Strategies: Indexed Variable Annuities May Provide a Buffer from Loss

May 22, 2019

By Dan Schulte, Vice President and Manager, Annuities and Insurance

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There are times when stock market volatility leaves some investors worried about meeting their retirement goals. This has left many of these individuals seeking products that can provide downside protection with upside potential.  A product that can help give investors some degree of piece-of-mind in turbulent times is an Indexed Variable Annuity.

Indexed Variable Annuities (also known as buffered or structured annuities) are typically designed with a combination of variable and index-linked investment options that can balance both personal risk tolerance with growth potential as well as provide a protection of principal.

How it works

This annuity type typically allows investors a choice of one or more investment segments to invest in, each providing a return that is linked to the performance of an underlying market index. Some common examples of these indexes include the S&P 500, the NASDAQ 100, and the Russell 2000.

Once an investor has chosen a suitable index to track, a segment duration (usually 1-6 years) and segment buffer (ex. -10%, -15%, -20%, -25%, or -30%) can also be selected. The segment buffer provides built-in protection that can absorb the selected percentage of loss. The investor then absorbs any loss exceeding the buffer limit, that is more than that, should the underlying index perform more poorly in a given period.

What this means to an investor is that a portion of their account can be insulated from market loss, but it’s important to understand that for that portion to be protected, a limit on earnings will be placed on that money. When the selected index increases, typically there will be a limit (i.e. cap) on earnings.  The caps rates vary, but generally the longer the cap segment duration and the smaller the segment buffer; the higher the cap rate for the particular index allocation selected.

It is also important to realize that this annuity can still be exposed to extensive market downturns – and along with that, investors can still suffer the loss of principal. With that in mind, risk tolerance should be reviewed prior to moving forward with this particular annuity type.

Access to the Funds

Most of these contracts have no ongoing annual fees, however most do restrict access to the funds.  Typically, if a withdrawal is made from a variable indexed annuity within a certain period after a purchase payment (typically within three to six years, but sometimes longer), the insurance company usually will assess a withdrawal charge, which may also be called a contingent deferred sales charge. Most contracts will allow you to withdraw 10% of your account value without paying a withdrawal charge. Also, any withdrawals prior to age 59 1/2 (an age set by law) may be subject to additional fees and penalties.

Annuities can be complex products and you should understand the features, risks and costs prior to making a purchase. Your Benjamin F. Edwards & Co. financial advisor can help you analyze your situation and discuss various annuity options to consider as a complement to your portfolio.

Variable annuities are subject to investment risk, including loss of principal, and contract/policy values fluctuate daily. Investment returns and principal value will fluctuate with market conditions so that units, upon distribution, may be worth more or less than the original cost. Any guarantees are backed by the financial strength and claims-paying ability of the issuing company. Variable annuity guarantees do not apply to the performance of the variable subaccounts, which will fluctuate with market conditions.