What Is Principal Protection?
Principal protection refers to the guarantee that the money you put into an annuity will not be reduced by stock market losses. In a fixed indexed annuity, the insurance carrier does not invest your premium in equities. Instead, it holds your funds in its general account — backed by bonds and other conservative assets — and uses a small portion of the return to purchase index options. If the options expire worthless (i.e., the index fell), you simply earn no interest for that period. Your principal remains intact.
Why Principal Protection Matters
Market risk is one of the biggest concerns for retirees and near-retirees. A large loss close to retirement can permanently impair your ability to generate income in later years. Principal protection removes that specific risk from the portion of your savings in an FIA.
What Principal Protection Does Not Cover
It is important to understand what principal protection is and is not:
- It protects against market losses. It does not protect against losses from early withdrawal (surrender charges may apply).
- It applies to the accumulation value. Market value adjustments in some contracts can reduce the surrender value, even if the accumulation value is intact.
- It depends on the carrier's solvency. The protection is backed by the carrier's financial strength, not a government guarantee.
Principal Protection in MYGAs
In a multi-year guaranteed annuity (MYGA), principal protection is even more explicit. The declared interest rate cannot go negative, and the accumulation value grows at the locked-in rate for the full term.