Fixed Index Annuity: Do FIAs Get Stock Market Returns?

Hi there! Stan The Annuity Man, America's annuity agent here to talk about those beloved Fixed Index Annuities that everyone loves to go to the bad chicken dinner seminar for. And it sounds too good to be true because it is. They're not bad products. So, the question of the day is, do they get market returns? I mean, you're getting pitched that they do, right? So, Stan The Annuity Man, America's annuity agent, licensed in all 50 states including yours, what's the short answer before I start talking about it in detail? The short answer is sometimes, but not all the time. And with that, let's dive in.

Here's the bottom line with Fixed Index Annuities. I'm going to give you a short history of Index Annuities. So, sit back, grab your coffee and tea, and listen to Stan the Annuity Man as I tell a story about Index Annuities.

Brief History

In 1995, Index Annuities were put on the planet to compete with CD returns. Not market returns, CD returns. That's a good thing, right? Nod your head. Yeah, it's a good thing. CD returns. They protect your principal. They're Fixed Annuities issued by life insurance companies and regulated at the state level. They are not securities, which means they're not market products. Now, as I said earlier, they do get market returns sometimes. But it's blended returns over time, and you have to expect CD returns because that's historically what they've done, and that's okay. So, if you said to me, and I always ask these two questions to people when they say, "Okay, I'm thinking about annuities then. What type of annuity do I need?" Okay, here are the two questions. What do you want the money to contractually do? It's the first question. Go ahead and answer it. And when do you want those contractual guarantees to happen? Got it? Now, you can't answer the first one, "I want market returns," and you can't answer the second one, "I want to protect the principal, and I want that to happen now." You can't, okay?

Principal Protection Products

If you're looking for principal protection, you don't want to lose a penny; you don't want the markets to affect it. You don't want anything to happen to your money; you've worked hard and laid it on the line; two annuity products do that. Multi-Year Guarantee Annuities, which are Fixed Rate Annuities, which is the annuity industry version of a CD, that's the first type. And then, the second type is Fixed Index Annuities. Those are the two types that protect your principle 100%. Now, the difference is that with the Multi-Year Guarantee Annuities, like a CD, you get a specific interest rate. You know that interest rate. That interest rate's going to happen. You lock it in for a specific period of time. Duh. CD. Nod your head.

I'm not going to get in the weeds here because this is going to get ugly. It'd be like showing paintings to blind people, no offense to blind people. But Index Annuities are based on a call option, typically on an index, going slow here, and typically that index is the S&P 500, not including dividends. In essence, in English, contract anniversary date to contract anniversary date. So, let's just say December 1st to December 1st, that call option will expire. Now, at the end of that expiration, you're going to get some of that upside if there is any upside. The annuity companies limit that. They call them caps and spreads and all that stuff. It's pretty complicated. But the bottom line is you'll get a portion of that. But if the planets align themselves and the unicorns chase the butterflies and the Republicans get along with the Democrats, there are years that those returns might be pushing a market-type return.

Best Case, Worst Case

But most of the time, unicorns don't chase the butterflies, the planets don't align themselves, and the Democrats don't get along with the Republicans. What does that mean? You're going to get CD returns. The worst-case scenario with an Index Annuity is you won't lose any money. Now, there's a bunch of guys out there, guys and gals, agents that use this thing called zero is your hero. That's garbage. That's crap. All that means is you're not going to lose any money. Let's just say you're not going to lose any money. There is no zero is your hero. That's malarkey. I hate that. No offense to people who use that. Just stop using that. It doesn't sound good. However, the bottom line is that the worst-case scenario is zero with an Index Annuity. The best-case scenario is you will get to lock in a portion of that index call option, not including dividends.

And by the way, I say that because with the S&P 500, over 50% of the return is in dividends. Duh. Exactly. So, worst case scenario, you don't lose any money. In the best-case scenario, you get to lock in the amount, CD type, and enhanced CD type returns.

Here's the best part about Indexed Annuities: if you're thinking about them rationally and trying to own them rationally, that gain is going to lock in permanently. So, here's the first year, locks in here. Okay, so you start here and then the third year, let's just say you get zero. Big deal. It's still at this level. You haven't lost any money. In the following year, you get a return, it's going to lock in. It just kind of stair steps and locks in. It doesn't stair-step and lock in at 9 and 10 and 11 and 7 and 8 percent. It stair steps and locks in at three, four, five, and zero, and two and three. Rational, right?

How To Use It

So, how does Stan The Annuity Man and his army of clients across the country, in all 50 states, how do we use Indexed Annuities? Two ways. If you want it for pure principal protection, we can do that. But the primary way that the number one agent in the country uses Indexed Annuities is to attach Income Riders, which are attached benefits at the time we make the application that guarantees a future lifetime income stream. See, annuities are all about principal protection, income for life, legacy, and long-term care. The acronym is PIL.

Most people are looking for annuities for income for life. So, I use Indexed Annuities with these attached Income Riders for future income guarantees. Now, those future income guarantees are in place, but when you attach them to an Indexed Annuity or a Fixed Index Annuity, you're in control of that asset. You don't have to use that income stream; you don't have to turn it on. You can control that principal and change your mind, but it's there. It's like having a pension that you can turn on but don't have to. It's flexible. It's good. And also, two, it's a very efficient, affordable, low-cost way to deliver that income guarantee. That's the best way to look at Indexed Annuities. But returning to the original question of whether they get market returns? I know everybody out there was like, "Please Stan, tell me they're going to get market returns. Please, please tell me. Please, please, please tell me that I'm going to get market returns with principal protection. Please, Stan. Please."

Market Returns

No, you're not. You might one year out of a bunch, but not consistently. Be rational, be pragmatic. If it sounds too good to be true, it is every single time with annuities. Why? Because annuities are contracts. And as I told my wonderful staff today, I told them, "This is a sentence you need to remember, and it's the saying you need to answer every question. You can't polish a turd, but you can roll it in glitter." I know you're saying, "What? What's that?" That's The Annuity Man telling you that Indexed Annuities are good. They're contracts, and if they're used properly, they work. But you can't polish them up, right? So, remember that. I know you're saying, "He did not just say that." Yes, I did. I did just say that.

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.