Fixed annuities an alternative to market crashes

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In times of prolonged market crashes, some investors grow weary of falling balances and the subsequent stress of seeing one hard-earned saving disappear down the rat hole of Wall Street. Some may pull out of the market altogether, and only get back in after many months or even years of the next market rally, which lures them out of the shadows to dip their toes back in the markets. 

This usually happens after the markets have run a long way up, and the emboldened investor ends up buying at what might be the tail end of the next rally. This late-to-the-party investor unknowingly sets him or herself up for another shellacking when that rally fizzles out and turns into another crash. Rinse and repeat a few times and the investor ends up giving back even more money because he is unknowingly off in his timing of the markets.

The stock market by nature will take back some gains from time to time and even gnaw into some principal if the crashes are nasty enough. For those investors who lose sleep when times are bad, there is another way to possibly participate in market upswings, yet never expose their principal to negative performance.

A fixed indexed annuity (FIA) is a product sold by an insurance company and is basically a contract between the investor and the company. The annuity in this example offers a one percent annual interest rate, tax-free for the entire 7-year term of the contract, which equals about 7.2% at its conclusion. 7.2% is not necessarily fantastic, but it is guaranteed and added to the initial principal. 

If it stopped there, I wouldn’t consider it, but there is an added feature called “market participation” and it works like this:

When your contract becomes valid, it does so on a certain day, and that is “your day”. The S&P 500 stock index is measured on that day, and 12 months exactly to the day, it is measured again. If the S&P index is higher, your account has credited a portion of the increase. Once credited, it can never be taken back no matter which way the market then goes in the next 12 month measuring period. 

So if the market crashes by any amount, the money you made from the S&P in the first period is not taken back. Your account remains at that increased balance. They then wait another 12 months and repeat the process, crediting you with any increase, but never taking away anything. 

If the S&P ends down for the new 12 month period, your account doesn’t decrease a penny. They repeat that process every 12 months, adding a portion of the increase, but never reducing it. At the end of the term (in this case 7 years), you either get your principal back and the stock market participation amount, or the principal plus 7.2% interest rate, whichever is greater.

There may be early withdrawal penalties but they do allow you to take out up to 10% a year after the 13th month without penalty. There are no fees if you don’t violate the minimum withdrawal limitations, and the contract is guaranteed by the underlying insurance company. The participation rate can change on each 12 month anniversary and annuities are not FDIC insured. Investors should review all the terms and conditions of annuities and make sure you completely understand how they work before investing. 

In conclusion, a Fixed Indexed Annuity may be suitable for investors that want their principal and some rate of return guaranteed with no downside movement in the balances.  

“Watching the markets so you don’t have to”

Not a solicitation to buy or sell any securities. Expresses the opinion only of Marc Cuniberti and may not represent those of this media outlet, its staff, members or underwriters, nor any bank, brokerage firm or RIA and is not meant as investment advice.  Annuities are not FDIC insured and are guaranteed by the underlying insurance company. Early withdrawal penalties may apply. Annuities may or may not be suitable for all investors. Index funds attempt to track the underlying index but are only a proxy for that index and may or may not track that index exactly. Mr. Cuniberti’s website is www. Phone (530) 559-1214

Marc Cuniberti

Marc Cuniberti hosts Money Matters Financial Radio and the Money Management Radio on KVMR FM and is carried on 67 stations nationwide. He is a financial columnist for the Union News and half a dozen newspaper publications. Marc holds a degree in Economics with Honors from San Diego State University. He is a registered financial advisor for Vantage Financial Group in Auburn, California. He holds California Insurance License 0L34249 and is the owner of BAP Inc. Insurance Services. He also owns Bay Area Process Inc., an engineering and services corporation. He is the founder and producer of the video series “Investing in Community” carried on NCTV and on hundreds of social media sites. He is also the founder and administrator of Money Matters, Investing in Community Video Series, Fire Insurance Information and Inquiries, Daily Laughter and Inspiration and Nevada City Peeps Facebook pages. He has appeared on NBC and ABC television and the subject of a host of TV documentaries for his financial insights, successfully calling the banking and real estate implosion of 2008 two years before it occurred. Marc holds a teaching certification in Tang Soo Do Korean martial arts and is a former big brother for the Big Brothers Big Sisters program in Nevada and Marin Counties. He is presently media consultant for the IFM Food Bank of Nevada County.