3 Best Facts about Buffer Annuity
There are 3 best facts about Buffer Annuity you should know:
- What is a Buffer Annuity Definition
Buffer annuities are also called variable indexed annuities, giving a good indication of what they are: a cross between a variable annuity and an indexed annuity. Here’s a quick rundown of the differences between them:
- A variable annuityoffers investment options for your premiums in one or more subaccounts. Those investments are usually stocks, bonds, or mutual funds. You are not taxed on the gains your investments make until you begin withdrawing funds; however, if your subaccounts perform poorly, you could lose money.
- An indexed annuityoffers a percentage of interest on your principal that’s tied to the growth in the S&P 500, ranging from a capped percentage of the index’s gain (often 5% or 6%) to a low of 0% if the index experiences a loss.
- A buffer (variable indexed) annuityoffers a percentage of growth or loss that’s tied to the growth or loss of an investment such as options contracts, REIT indexes, precious metals, emerging markets, and more. Growth is capped at a higher percentage than an indexed annuity, usually 8% or 9%. The account may also experience a loss. That loss is calculated by subtracting a certain percentage (the “buffer”) from the overall percentage loss of the index. There may also be a stated “floor” that caps losses during a downturn.
- Generally, they allow clients to receive returns that are linked to a stock market index over a limited period of time. Those returns are subject to a limit that is determined periodically by the life insurer.
- At the same time, insurers use options to duplicate the performance of the index and to buffer a percentage of downside risk, which varies across the board on products offered by the insurers.
- How a Buffer Annuity works
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.
- Buffer Annuities and Indexed Annuities
Buffer annuities do not protect (or claim to protect) completely against the risk of investment losses.
Most products only offer a degree of downside protection (they provide a “buffer” against market losses).
For example, when a buffer annuity offers a 10 percent buffer against losses, the insurance company that sold the product will absorb the first 10 percent of losses.
The investor himself experiences the remainder of the loss.
Although these products are riskier than indexed annuity products (that typically protect against any loss of principal), they can offer higher “caps” than most indexed annuities.
A cap, as the name suggests, serves to cap the client’s credited interest at the cap amount (for example, if the market gained 10 percent and the cap is 6 percent, 6 percent will be credited, but if the gain was 1 percent, the client would receive the 1 percent credit because it is less than the cap amount).
Buffer annuities usually offer caps of around 8 to 9 percent.
Because of this, the client is able to more fully participate in market gains, which is appealing to many clients who feel that annuities create opportunity losses when the markets are strong.
However, clients looking for income protection during retirement should think twice about the risks involved with buffer annuities.
Because buffer annuities focus on accumulation value, rather than providing stable income during retirement years, buffer annuities may not be suitable for clients who are looking for the typical security offered by an annuity.
Mintco Financial Retirement Planning Florida – NY
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