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Are Fixed Index Annuities for You?
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Hi there, Stan The Annuity Man, America's annuity agent, licensed in all 50 states. I'm so glad you joined me. If you just stumbled across us, welcome! If you're one of our 15,000+ subscribers, thank you so much. We really enjoy doing these for you.
The Importance of Understanding Fixed Index Annuities
Today's topic will inform a lot of people. It's going to save a lot of people from making bad decisions, and hopefully, it's going to help the industry because I like doing that. This product is causing some issues, and the topic is: are Fixed Index Annuities for you? Should you own one? Should you consider owning one?
Fixed Index Annuities are contracts like all annuities, and we need to talk about what those contractual guarantees do with the policy. But this type of Fixed Annuity gets over-promoted, over-sold, over-promised, and over-hyped for many reasons. We're going to go through all that in a rational, non-yelling, non-emotional way. I know you're thinking, "Really, Stan?" But it's very important right now for you to understand this.
Are Fixed Index Annuities Right for You?
Are Fixed Index Annuities right and appropriate for you? Should you consider them? Let's get into that—but not until I hear some tunes.
A Brief History of Fixed Index Annuities
Let’s start with a little history lesson. Fixed Index Annuities were first introduced in 1995 as a solution and a competitive product against CDs (Certificates of Deposit). Back then, the goal was to create something that might offer a little better return than CDs but without being a market product.
Now, that's where the problem starts. Too many agents and advisors are promoting Fixed Index Annuities as market products. They are not. They’re life insurance products. They’re Fixed Annuities. They're not market products, and they’re not overseen by the SEC and FINRA. But I’m telling you, if the sales pitches continue the way they are, they will be because you have people talking about "market upside with no downside" and "market participation with principal protection." All that sounds fantastic.
Reality Check on Sales Pitches
My comment on that is this: If they were that good, that’s all Goldman Sachs, JP Morgan, and our government would buy. If you could get market upside with no downside, why wouldn’t they? Some of the sales pitches are outrageous, like, "Well, if you’d owned it 10 years ago, look at these juiced numbers you’d have." In many states, you can’t even show those numbers, okay?
Understanding the Index Annuity Space
What you need to know about Index Annuities is that they’re not a bad product. We're not against them. We primarily use them for the Income Riders that you can attach to them at the time of application to solve for income in the future. These Income Riders provide a contractually guaranteed lifetime income stream. You can set up single life or joint life, but it rides on top of the Index Annuity. We really don’t focus on the index annuity itself.
Index Annuities can be very complex. The strategies they use are index options. And right there, we’re getting into the weeds. The limitations on the upside are influenced by three things: caps, spreads, and participation rates.
The Complexities of Caps, Spreads, and Participation Rates
I've written a book on Fixed Index Annuities—A Fixed Index Annuity Owner's Manual. You can download it for free at The Annuity Man. I’ve also done many videos about the intricacies of Index Annuities.
You need to understand that most Index Annuities—though not all—can change how the potential gains are calculated annually at their discretion. These caps, spreads, and participation rates can be adjusted.
In other words, if you bought a 10-year surrender charge annuity, you’re really buying a one-year guarantee with a 10-year surrender charge, because years 2-10 can be changed at the discretion of the annuity company. These are called renewal rates, which brings me back to my main point: If you can’t explain the annuity to a nine-year-old or a group of second graders, don’t buy it.
Warren Buffett’s Rule for Investing
Who am I echoing here? Warren Buffett. He doesn’t buy anything he doesn’t understand. You might ask, "Is that true?" Yes, he owns Coca-Cola, candy, Aflac, and other companies. The point is, he understands how they work. Most agents and advisors showing you Index Annuities couldn’t explain the caps, spreads, and participation rates.
All I’m going to tell you is this: If it sounds too good to be true, it is. Every. Single. Time.
The Upsides of Index Annuities
The good news about Index Annuities is that if you achieve a gain during that contract anniversary period, it’s locked in permanently. Great, right? But here’s the issue: as of this blog, there are over 750 index option choices, and they’re all designed to create similar returns. This doesn’t make the Index Annuity space bad. If you go into an Index Annuity saying, "I’ll be fine with a 2-5% return," you’re going to like it. But if you go in thinking you’ll get 7-9-10% every year, year after year, you’re not going to be happy.
What to Expect from Fixed Index Annuities
Those types of returns come from hedge funds, private equity, and family offices. They take risks to get those returns, and you must be smart. You can’t be the sucker at the table.
So, are Index Annuities right for you? They might be if you need income later, and we’re attaching an Income Rider to it. They might be if you want a 2-5% return and are okay with that. If you get more, great! But don’t go into them thinking you’ve found some secret product that no one else knows about. No, everyone knows about it. They’ve been around since 1995.
Be Wary of Upfront Bonuses
Another warning: If someone approaches you with an Index Annuity and leads with, "Oh, by the way, if you sign the paperwork, you’ll get an upfront bonus," don’t fall for it. Please tell me you're not that gullible. There are no philanthropists at annuity companies. These are for-profit life insurance companies. There’s a hundred pennies in the dollar, and if they’re giving you an upfront bonus, there’s a catch.
The Reality of Bonuses and Commissions
When we quote Income Riders, we include all carriers, with or without bonuses. It doesn’t matter to us—it’s all part of the contractual guarantee. But don’t put too much weight on that upfront bonus. I call upfront bonuses "candy for the stupid" because if you believe you’re getting free money from a life insurance company, you’re the target the agent is looking for.
Conclusion
Buy an annuity for what it will do, not what it might do. If you can’t understand it, don’t buy it. If you’re looking for a CD-type return or need lifetime income with an Income Rider, then Fixed Index Annuities might work for you.
At the end of the day, Index Annuities are fine if you understand them. We just have a problem with how many are pitched and sold. Be careful out there.
Go to my site at The Annuity Man, schedule a call with us, and I’ll see you on the following Stan The Annuity Man blog.