FIAs: The Real Story: Shootin' It Straight With Stan

Welcome to Shooting It Straight with Stan. I'm your host, Stan The Annuity Man, America's annuity agent, licensed in all 50 states. Today's topic is FIAs: The Real Story. We get a lot of calls about this because people are getting sales pitches that sound too good to be true—because they are. We have nothing against Indexed Annuities, but let’s dive into some history and the hidden facts that come with them.

History and Purpose of Indexed Annuities

Indexed Annuities were introduced in 1995 to compete with CD returns. In other words, the goal of these products was to get a couple more percentage points than a CD, and they’ve done that. They’re not market products, and one of the biggest fallacies is how they’re sold. Phrases like "market upside with no downside" and "market upside with principal protection" sound too good to be true because they are.

Indexed Annuities are Fixed Annuities issued by life insurance companies and regulated at the state level. They are not securities, meaning they are not regulated by FINRA or the SEC. Unfortunately, this makes them a bit of the "wild, wild west" when it comes to sales pitches—not all, but a lot. If you attend seminars or expensive steak dinner events, most of the time it’s a one-size-fits-all, one-carrier approach trying to sell one product to everyone, which is insane. It’s like a doctor holding a seminar trying to sell one medication to everyone in the room. People either need annuities, or they don’t.

The Sales Pitch and High Commissions

Indexed Annuities are often the "GoGo" product in the industry because they carry the highest commissions. All annuity commissions are built-in and hidden from the client, which I’m not sure I like, but it’s the rule.

Indexed Annuities have the highest commission, and if you sell enough of them, you can go on trips to places like Italy, Bora Bora, or France. These incentives disappeared in the securities industry in 2003, and I wish they would disappear in the annuity industry as well, but they haven’t. The annuity industry’s life insurance lobby is pretty strong, so I doubt that will happen anytime soon.

Understanding Indexed Annuity Options

Now, let’s discuss more facts and hidden truths about Indexed Annuities. The indexed option strategies on the accumulation value are what you probably hear about if you're breathing and have a bank account. These are the options with caps, spreads, and participation rates—terms you’ve probably never heard of before. These are levers used by the life insurance company issuing the indexed annuity to limit the upside. They are for-profit companies, so they are trying to offer a little better return than CDs, but that’s about it.

There are over 750 index option choices available, and in my opinion, you could throw a dart at them, and you’d be okay because they’re all designed to get the same return in most cases. There are more than 50 index choices available, and yes, it may seem endless. There are S&P, Russell, and others, but most index choices can be counted on one hand. One issue in the Index Annuity space is that some carriers will create an algorithm to back-test returns. They look for a great return with a basket of investments, but it’s hypothetical, not guaranteed. Once they find that return, they attach it to an Indexed Annuity, and unfortunately, a salesperson might say, "If you had owned this 10 years ago, this would have been your return."

The Complications of Index Annuities

Unfortunately, these indexes often only exist on paper for a few months before they disappear, and many states are starting to disallow this type of back-testing. Add to this the fact that there are over 50 index choices and 750 options, and things get even more complicated. Most index options last one year, but some last two, three, four, or even five years. And this makes things even more complicated. Most of the time, you lock in your rate on the anniversary date, which means you're stuck with it, but some longer-term options allow you to lock in whenever you want, adding even more confusion.

At The Annuity Man, we typically use Indexed Annuities 99% of the time as a very cost-effective and efficient delivery system for Income Riders. These are contractually guaranteed income options that you can attach to your policy at the time of application. If you visit my site, you'll see Income Rider quotes, but you won’t see Indexed Annuity quotes because there’s nothing to quote. The reason for that is simple: when it comes to caps, spreads, and participation rates, you really need to understand how these work, and I’ve written an Indexed Annuity owner’s manual to explain them.

Why Indexed Annuities Are Not Growth Products

Let’s start with the basics: If you buy a 10-year Fixed Index Annuity for growth, you’re not buying it for growth. It’s not a growth product. You’ll know the cap, spread, and participation rate from the start, but the problem is that Indexed Annuities often offer a one-year guarantee with a 10-year surrender charge. The annuity industry can change the terms of the cap, spread, and participation rate at the anniversary date, which means your return could change drastically. For example, you might see a 7% cap in year one, but it could drop to 2% in year two. While I’m not against the annuity companies (they are for-profit businesses), this shows why you shouldn’t buy Indexed Annuities for growth.

Principal Protection and Income Riders

You should buy Indexed Annuities for principal protection first, CD-type returns second, and third, what we use them for: attaching an Income Rider for future income needs. We like Indexed Annuities because, after the surrender charge period, you can get your full accumulation value back if you don’t need the income anymore. However, the indexed options can be very complicated. I joke that I know five people who fully understand Indexed Annuity options—I’m one of them. If you can’t explain it to a nine-year-old, don’t buy it.

Over-Hyped Products and the 2008 Debacle

Indexed Annuities became popular after the 2008 market crash because people were shell-shocked, and it was the perfect time to introduce the product. Since then, it’s been over-hyped by agents because it’s a high-commission product, and it’s an easy story to sell if you're not telling the full truth. If you only give the 30,000-foot view, it sounds great: upfront bonus, market upside with no downside, free long-term care, and lifetime income. But let’s break that down:

1. Upfront bonus: Buying an Indexed Annuity for the upfront bonus is like buying a brand new car for the stereo system. There are a hundred pennies in the dollar, which should be irrelevant to your decision.
2. Market upside with no downside: This is completely wrong and borderline fraudulent. Indexed Annuities were designed in 1995 to compete with CD returns, not to provide market upside with no downside.
3. Free long-term care: No, it’s not free long-term care. It's confinement care, not the true long-term care that’s a health insurance product with good tax benefits.
4. Lifetime income: This is the only truth in the sales pitch, but if that’s your goal, shop all carriers for the highest contractual guarantee for lifetime income.

The Hidden Truths About Indexed Annuities

Indexed Annuities are not one-size-fits-all products. You need to solve for specific goals. Annuities solve for four things: principal protection, income for life, legacy, and long-term care. If you don’t need to solve for any of these, you don’t need an annuity. And don’t buy a product that tries to solve them all. Shop for the carrier that offers the highest contractual guarantee for your specific goal.

A guy called me recently, saying, "You sent me the specimen policy on the indexed annuity, and all the explanations were complicated math problems with letters in them." I said, "Yeah, that’s calculus." It’s very high-level stuff, and the rules can change at any time.

Conclusion

At the time of this blog, we haven’t found an Indexed Annuity that we recommend for accumulation value. We mainly use them for principal protection and Income Riders. But they’re presented as too good to be true. Indexed Annuities are complicated, and the sales pitch can be misleading. If you want to learn more, you can get my book, watch my videos, or schedule a call with us. Just remember, if it sounds too good to be true, it probably is.

My name is Stan The Annuity Man. That’s Shooting It Straight With Stan. I hope this helped. We’ll see you next time.