Why are people suddenly starting to invest more an more money into Fixed Indexed Annuities.  The answer is because it makes a lot of sense in this type of rate environment. 

People that are familiar with how a fixed indexed annuity works and understand how the minimum guarantee and the index accounts all work together are comfortable with the opportunities that these annuity products provide. 

All Fixed Indexed Annuities have what is called a minimum guarantee (To read more about how minimum guarantees' work see our article EIA - Minimum Guarantees) Understand that they have a safety net in place that will guarantee a certain amount of interest no matter what.  In  most cases these minimum guarantees range between 1%-2% per year depending upon the product.  The way I describe this is your opportunity cost.  Whenever you invest in one thing you always have opportunity cost, what you could have received had you done something different.  In this case I compare the opportunity cost to purchasing a 1-5 year Certificate of Deposit from a bank.  Most CD's are currently yielding 1%-2% depending upon where you go.  That means that had you invested your money into a CD you would earn 1%-2% on your money.   Conversely if you invest your money into a Fixed Indexed Annuity you will also get 1%-2% interest each year but you also have the opportunity to earn much, much more. 

Aside from the Minimum guarantee that these Fixed Indexed Annuities offer, they tend to have attractive index strategies (To read more about index strategies see our article Index Strategies Defined).  An index strategy can provide the kind of interest rates that most people are looking for, and in some cases meet the returns of a various stock market index.  The most common index strategy is known as an annual point to point index method.  This method typically has a cap associated with it currently between 4%-5% meaning that you capture 100% of the upside of the stock market up to 4%-5% in interest.  If the stock market index doesn't cooperate and goes down you do not lose a dime, instead you are credited with 0% interest.  But wait, let's not forget about the minimum guarantee that you still get between 1%-2% interest.  Add it all up and what you get is a CD type return with the potential of getting interest rates in the 4%-5% range and all with no risk to you.

There are many great annuity products currently on the market today.  We tend to like products that have liquidity features that allow investors to withdrawal 10% per year without penalty.  As far as contract length goes we are torn.  The shorter term annuity contracts (5-6 years)  are nice because they mature sooner, however the longer term you go have the greater opportunity for future growth and typically come with a 10% upfront bonus.

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