Fixed Indexed Annuities Explained

FIA 101: The Basics

No, this isn't going to be a two-hour-long rant. Still, it could be if I was going to explain every nuance of Fixed Indexed Annuities, indexed annuities, hybrid annuities, whatever you're being pitched. Let's get down to the topic. Let's get down to the meat of the matter of indexed annuities. What is a Fixed Indexed Annuity? It's simple; it’s a fixed annuity. It's regulated at the state level but an FIA Fixed Indexed Annuity. F-I-A is the acronym introduced in 1995 to compete with CD returns.

So I know people out there in the hinterlands of the annuity world, the internet, the bad chicken dinner seminars, whatever, they're pitching index annuities as market return products. They are not. They're CD return products. They're also a very efficient and cost-effective way to deliver an income rider guarantee. Indexed annuities can be very complicated. Currently, there are over 700 index option choices available to you at the time of this taping. Indexed annuity, though certainly, I am not going to go through every single one. But at the end of the day, a Fixed Index Annuity is a CD product. What is the downside of Fixed Indexed Annuities? Let's start with the upside. That's a positive.

FIA Benefits

Another positive is any gains that you earn with an index annuity are locked in permanently at that contract anniversary date. So those are some great things. In addition, and another positive, as I mentioned previously, it's a very efficient and cost-effective delivery system for an income rider guarantee. That's primarily how I like to use index annuities, but it is a good product when people fully understand how it works. Not the sales pitch and the pie in the sky, and the unicorn chasing the butterflies presentation that everyone's giving out there, which is market upside with no downside and principle protection with potential market upside, all that yummy catchphrase nonsense.

Annuities are contracts, so a Fixed Indexed Annuity is a contract issued by a life insurance company.

Negatives

Just remember, if it sounds too good to be true, it is. I think the disadvantages of indexed annuities are that you will not get market returns. It's not a market return product; it’s not a security. It's a fixed annuity regulated at the state level. The other thing that I think is a negative is that, for instance, when you buy a ten-year surrender charge Fixed Indexed Annuity that has one-year call options on the index part, you're, in essence, buying a ten-year surrender charge with a one year guarantee because the annuity companies can change the way the caps and spreads and participation rates.

Renewal Rates

They can change the way those are calculated at their discretion. So one of the things that you need to be aware of is what's called renewal rates. And some companies are very fair to the customer with that, and some just seem historical not to be. We can walk you through all of that, but as long as you have in your mind that it's a CD-type product, you're going to be fine.

I don’t blame the annuity companies. They can't regulate how people are trying to sell their products. That's like if you went to a car dealership and the guy is saying, "This little Ford Pinto can climb mountains." No, it can't. The same thing in the annuity industry is that you do not need a security license to sell index annuities. You only need a state life insurance license.

So many people out there who are selling them have never been in managing real market assets, et cetera. So you have to be careful. Don't believe the sales pitch. There are advantages to index annuities and disadvantages, just like with every annuity product. But you have to know both before you make a good decision.

Fixed Annuities vs Indexed Annuities

So what is the difference between a fixed annuity and a Fixed Indexed Annuity? I talked to my team before we went in to shoot this, and they're giving me all these examples. Of course, I can't remember anything. I'm on the fly, man. I'm just riffing here. But what you have to understand is a Fixed Indexed Annuity is a fixed annuity.

The fixed annuity category is Fixed Indexed Annuities, Multi-Year Guarantee Annuities, immediate annuities, Deferred Income Annuities, and Qualified Longevity Annuity Contracts. Those are all fixed annuities. So a Fixed Indexed Annuity is a fixed annuity. All Fixed Indexed Annuities are fixed, but all fixed annuities aren't.

So the question is, are Fixed Indexed Annuities a good investment? Number one, I don't consider them an investment. Annuities are contracts, so a Fixed Indexed Annuity is a contract issued by a life insurance company. It's a CD product that doesn't make it good or bad, but it's not secure. It's not a market product. It's not a market-growth product. It's not a principle. It's a principle protection product, but it's not too good to be true pie in the sky, unicorns chasing the butterflies type product you hear.

One of the things about index annuities on the sales pitch, and this will sound so good to be true. When I say it, you'll lean into the screen and go, "Oh, that sounds good." Here's the pitch. You get a 10% upfront bonus for signing the paperwork, you get market upside with no downside, you get free long-term care, you get an income rider for lifetime income, and you go, "Wait a minute. That sounds good."

The bonus never buys an annuity for an up upfront bonus. You never transfer an annuity for an upfront bonus. I call upfront bonuses "Candy for the stupid." Because if you believe that someone's giving you free money, you're the room at the table in Las Vegas. It's just part of the overall contractual guarantee. Upfront bonuses are fine. For instance, when we quote Fixed Indexed Annuities with income riders, some products have bonuses, and some don't. The funny thing is a lot of the time, the contractual guarantees, the highest, do not include the upfront bonuses.

The Sales Pitch

Let's go through the rest of the pitch, and mark it upside with no downside. We covered that. These are CD-type products that sound good at a 30,000-foot pitch. The next thing that they'll talk about is free long-term care. That is not true. Long-term care is a health insurance product. That is a great product. You should never cash in your proper long-term care coverage for an indexed annuity with a confinement care rider.

You can get confinement care and nursing home care coverage, but these are guaranteed issue products. So if you're smoking 12 packs of Lucky Strikes with no filter and you're drinking a bottle of Jack Daniels every day, you do qualify for these confinement care, nursing home care riders. That doesn't make them great because there's no bar for entry. You have to go through the underwriting procedure with traditional long-term care. If it sounds too good to be true, it is every single time with annuities without exception.

I don't call them investments; I call them contracts. So if you want that type of contractual guarantee, it could fit your portfolio. If you're looking for principle protection, if you're looking for CD-type growth, and if there's a possibility that you want future income, we can attach an income rider and quote all income riders for the highest contractual guarantee. So under those scenarios, it might fit your specific situation. Just don't buy it for market growth.

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.