MYGA Fixed Rate Annuities
Current Rates As High As
5.36%
3 YR 
5.60%
5 YR 
5.55%
7 YR 
5.20%
10 YR

Fixed Index Annuities- Explained

fixed-index-annuities-explained

How does a Fixed Indexed Annuity work? The panacea product, the too good to be true, the greatest product since sliced bread.  Let's talk about Fixed Index Annuities. The history of a Fixed Index Annuity used to be called equity index annuities, but not anymore, is in 1995 when they were designed and introduced to compete with CD, typical, normal, normal CD returns, not the time of this taping. Still, MYGA returns, Multi-Year Guarantee returns, that 2 to 4% range, that's kind of normal. That's what they were put on the planet to do. They are not securities. They do not provide market growth, even though that's what you’ll hear on the bad sales pitch.

So let's talk about how they work in a 30,000-foot view. In essence, a Fixed Index Annuity is a fixed annuity. It's issued and approved at the state level, okay? A life insurance company issues it. And the growth story, which is the problem of the whole sales pitch, revolves around what's called a call option. In English, a call option says, "Okay, I'm going to buy it at this date, a year later, I'm going to get a portion of the gains."

I know that's a 30,000-foot view, but a call option is betting on, not bet, but you're saying, I think that the market is going to go X to, from, the S&P from this point to this point, I'm going to share in some of the gains. That's where the story gets a little muddled because the annuity companies aren't going to give all of that upside away, period. Some levers limit the upside. They can be called caps, participation rates, or spreads. It gets very, very complicated.

But understand this, when you buy an index annuity, let's just say it's the S&P 500 Index. Let's just say that's the bogie; that’s what you're using, many lot of the index annuities use that. That S&P Index that you're buying the call option on, that's what the index annuity is doing, does not include dividends. Why is that important? The reason is that the S&P 500 Index, over 50% of the historical returns of an S&P 500 Index, includes dividends. Index annuities that point to point or whatever options you choose do not include dividends.

Index Annuities aren't too good to be true, but they're pretty darn good if you understand the truths and the facts in how they were developed and designed in 1995 for principal protection, CD returns, and providing a lifetime income stream if you want to attach an income rider.

Now, the other thing you need to understand about index annuities is that the annuity company that issues the annuity, the index annuity, can change the rules at their discretion, right? Some favor these renewal rights, and some companies are not. So you have to be very careful about what you choose. I told a guy who called in the other day, saying, "I bought this 10-year index annuity, which has a one-year call option." I went, "Okay. You do understand, though, you bought a 10- year surrender charge product with a one-year guarantee?" Because every year, that annuity company will give you renewal rates on what those caps and spreads and participation rates are.

So index annuities, we love them. We use them as a CD product, and we use them as an efficient delivery system for income riders. But be very careful out there. You're going to hear things that sound so good to be true that you think the world is solved by buying this product. It is not a size fits all product. You can attach income riders for future income guarantees at the time of application, but also understand that at the time of this taping, look at the date; there are over 750 index option choices in the index annuity world. That is a lot. I mean, that is an absolute ton.

Now, the good news about index annuities is when you do have a gain, and it's going to be limited, it's not going to be market-type returns; it’s going to lock you in permanently. That's a good thing. But the bad thing is the agents and advisors will push that greed in the back of your head that says, "Hey, you're going to get market returns, and there's no downside. The market upside with no downside." Sounds great. Where do I sign up? Be careful. If it sounds too good to be true, it is every single time.

Let's talk about some other things about index annuities that make the top of my head pop off. Please don't be that stupid person out there that thinks there are annuity companies giving money away for free. They're not. There are a hundred pennies in the dollar, and an upfront bonus is part of that hundred pennies. So if they're giving an upfront bonus, they're taking something away somewhere in that policy. That's just a fact. I mean, you can't even argue about that. So if someone says, "Well, if you sign up and I'll give you a 25% bonus, the annuity company," there's not a philanthropist, an annuity company going, "You know what? I'm going to give money away. I just want to give money away to the people." No. It's an attractive piece of candy for you to sign up.

Now, in some cases, does it work out contractually? Yes. In some cases, no. When you have me look at an index annuity or index annuity with an attached income rider, we’ll quote all carriers with bonuses, without bonuses. We show you the highest contractual guarantee for your specific situation. Just to clarify, everyone's yelling at me when I said something to the effect you buy the call options. You don't buy them. The index annuity company buys them on your behalf. So just semantically, I was a little bit off there, but some people say, "Stan, you're a little bit off anyway," but I digress.

Let's talk about whether you can lose money with a Fixed Index Annuity. No, no. It's a fixed annuity, so there's not going to be any downside if the market goes bad. If it does and goes down, you're not going to lose any money. That's a good thing. At the time of application, you attach an income rider to an index annuity. An income rider is an attached benefit for future income that you can start to pension income at a future date, and the index annuity is a delivery system for that guaranteed income. But that rider comes with a fee, typically.

So semantically, if the markets did zero and your index annuity got zero, and they're taking, the annuity company's taking that income rider fee from the index annuity, technically, you could have less money. Has that happened historically? No, not really, but I'm just saying that there is a lifetime fee annually for that income rider if you decide or if we decide on the phone that an income rider makes sense for you.

If you surrender the policy during that surrender charge time period, and typically that time period's going to range from five years, seven years, 10 years surrender charge, if you have a 10-year surrender charge on your index annuity and you surrender it at year five, you're going to lose money 'cause there's going to be a surrender charge penalty on that index annuity.

People always ask me, "Stan, what's the downside of an index annuity?" The downside of index annuities, you're not going to get market returns consistently. You might get it one year, but you're just not, that's not what they're designed to do. They are typically long-term products, and you must ensure you’re buying them for the right reason. If you're buying it for market returns, you're buying it for the wrong reason. If you're buying it for principal protection and normal CD-type growth, that's fantastic.

The other downside typically is the sales pitch. You're buying the sales pitch and then get the contractual realities in the mail, right, in the policy, but there's upsides, too. Let's talk about that. The upsides, it's principal protected. Gains are locked in. Even though they're limited gains, they are locked in permanently, and you can attach an income rider for future pension needs.

So, how does it fit into your retirement portfolio? How does an index annuity fit? Where does it fit? I'll tell you where it doesn't fit. It doesn't fit market growth. If you want market growth, real rates of return, never, ever, ever, ever, ever, ever, ever, ever, ever buy an index annuity for that, okay? But where it fits in your portfolio, two places. Number one, principal protection. If you do not want to lose any money with market downturns, that is a good product to go to. It's a, remember CD type, normal CD type returns.

In your portfolio, it could fit for income. When you need future income, like you said, "You know what, Stan?" Because I always ask people two questions. What do you want the money to do contractually? When do you want those contractual guarantees to start? If you said, "Hey, Stan, The Annuity Man, we need income to start in seven years," then we might attach an income rider so it could solve lifetime income needs. So in your portfolio, it could be a lifetime income guarantee pension type product to combine with your pension, if you're so fortunate, and your social security or a principal protection product.

Index Annuities aren't too good to be true, but they're pretty darn good if you understand the truths and the facts in how they were developed and designed in 1995 for principal protection, CD returns, and providing a lifetime income stream if you want to attach an income rider.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.


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