Have you ever played Black Jack?
Just incase you are new to to the game, let me explain how it works. You buy into each hand in hopes to double your money each time by winning against the dealer. Let’s say you buy in with $10, and you win the hand. You would get $20 for your victory. Now, on the other hand if you lose, you simply forfeit your initial $10.
How does this relate to what the term “indexed” means for Annuities and IULs? Let’s say we play the same game with the same buy in of $10. When you win, instead of doubling your money you only get $7 in addition to your $10 back, so $17 total. However, if you lose… Your initial $10 buy in is returned to you. You don’t lose it. This is similar to how these indexed annuities and ULs work.
Let’s talk more about what “indexed” means for annuities and IULs.
If you have not yet read our What is an Annuity? article, you may wish to start there first for some basic information, then revisit this article to gain a better understanding. You can find the What is an Annuity? article here.
Terms to Know
Before we dive in to how the index works with annuities and IULs, let’s first talk about a few of the terms you will see and what they mean.
- Index
- Participation Rate
- Cap
- Spread
Index is a gauge of how well the market is performing overall. For example, groups of stocks such as the S&P 500 or Nasdaq 100 are both indexes.
Participation Rate is the percentage of your money that gets the interest from the index. For example, 100% Participation Rate, means every dollar of your money gets the gain of the index.
The Cap is the most you can get off the gains of the index. For example, if the gains are 5% and your Cap is 7%, you will get all 5% of the gains of the index. On the other hand, if your Cap is 7% and the index gains 10%, you will only receive a 7% gain on your money.
Spread is the difference between the percentage the index goes up and the what you get accredited to your account. For example, if the market gains 10%, and you have a 2% Spread, you will receive 8% gains on your money.
Now, you may not see all three, Participation Rate, Cap, and Spread, in a single annuity or IUL. Usually, you will see a Participation Rate and Cap, or Participation Rate and Spread. It all depends on the vehicle you choose and how it works.
Index Options
Every annuity and UL has a specific index it follows. Here are just a few of the ones out there. You may recognize some of them.
- S&P 500
- Nasdaq 100
- Russel 2000
- European Market
- China Market
When opening an annuity or UL, you will get to choose which market in which you want your funds to reflect. Personally, I always choose the S&P 500 as the index, because it is well known, and is made up of 500 of the largest companies in America. This creates some consistency and stability in the index itself.
Have a question or need help determining if an Indexed Annuity or IUL is right for you? Schedule a free consultation here.
Is an annuity right for me?
Now that you have a better understanding of how an annuity works based on the index, you may be wondering if it is the right place to put your retirement money.
While an annuity is all about safety and making interest, they are not for everyone. Let’s help you determine if an annuity is right for you.
One thing to consider when thinking about an annuity for your retirement funds is how close you are to retiring. For example, someone in their 60s is approaching retirement if not already there, and likely can’t afford to loose ANY money when the market goes down.
Someone in their 50s is approaching retirement and may not have enough time to get money lost in the market back by the time he or she retires. Therefore, an annuity would be a safe option to transfer funds to.
Now in your 40s, it is a judgement call. You have some time before retirement to let the market play out. The question is, “Are you ok with losing money?” If the answer is no, then an annuity may be right for you.
Someone in their 20s or 30s has time for the market to play out, so annuities are not usually the best choice for them unless they don’t like risk.
At the end of the day, determining if an annuity is best for you depends on:
- How close you are to retirement
- If you can afford to lose money
- If you have time to gain losses back
- What your risk tolerance is
Have a question or need help determining if an Indexed Annuity or IUL is right for you? Schedule a free consultation here.
Which annuity is best for me?
As we mentioned above, there are several factors that play into which annuity might be right for you. I will say, not all annuities are the same and not all annuities are good. On the other hand, some are great.
Do you have a question on whether an annuity is right for you?
Maybe you have an annuity and would like a review?
Have you been considering an annuity for your retirement, but want another opinion to make sure it fits your needs the best?
We are here to help you. At the end of the day, we want you to have a clear vision of what your annuity can do for you, as well as, have peace of mind that your funds are safe while gaining the most money possible.
Do you want to make sure you have enough coverage and savings for your needs? Get our free, printable Needs Analysis here.
