Fixed Indexed Annuities: Everything You Need to Know

No, this isn't going to be a two-hour-long blog. Still, it could be if I were to explain every nuance of Fixed Indexed Annuities, Indexed Annuities, hybrid annuities—whatever you're being pitched. Here's the good news: I've written a book on it, and you can download it for free without obligation. But let's get down to the topic. Let's dig into the meat of the matter of Indexed Annuities.

So, what is a Fixed Indexed Annuity? It's very simple. It's a Fixed Annuity. It's not a security; it's regulated at the state level. In essence, a Fixed Indexed Annuity, or FIA (F-I-A is the acronym), was introduced in 1995 to compete with CD returns. It is a CD-type product. I know that out there in the hinterlands of the annuity world—the internet, bad chicken dinner seminars, and so on—people are pitching Indexed Annuities as market return products. They are not. They are CD return products. They’re also a very efficient and cost-effective way to deliver an Income Rider guarantee for future income needs.

Indexed Annuities can be very complicated. Currently, at the time of this blog, over 700 index option choices are available to you. I’m certainly not going to go through every single one, but in the book I mentioned earlier, which I want you to get for free and with no obligation, I explain many of the options available and break down caps, spreads, participation rates, and all that jargon you hear when people pitch indexed annuities. But at the end of the day, a Fixed Indexed Annuity is a CD-type product.

Upsides of Fixed Indexed Annuities

First, let's start with the positives. Fixed Indexed Annuities are fully principal protected. You’re not going to lose any money due to stock market gyrations, which is a significant advantage. Another positive is that any gains earned with an Indexed Annuity are locked in permanently at the contract anniversary date. Those are great features.

Additionally, as mentioned earlier, it’s a very efficient and cost-effective way to deliver an Income Rider guarantee. That’s primarily how Stan The Annuity Man, America’s Annuity Agent, uses Indexed Annuities. When people fully understand how they work—not the sales pitch about market upside with no downside or the "unicorns chasing butterflies" presentations—they see it’s a good product for specific needs. Always remember: If it sounds too good to be true, it is.

Downsides of Fixed Indexed Annuities

One disadvantage is that they are not market-return products. These are not securities, but Fixed Annuities regulated at the state level. Another drawback is when you buy a ten-year surrender charge Fixed Indexed Annuity with one-year call options on the index part—you’re essentially buying a ten-year surrender charge with a one-year guarantee. This is because annuity companies can change the way caps, spreads, and participation rates are calculated at their discretion.

You need to be aware of renewal rates. Some companies treat customers fairly, while others historically do not. You'll be fine if you view it as a CD-type product.

The primary issues arise from how Indexed Annuities are sold, pitched, and presented. I don’t blame the annuity companies; they can’t regulate how their products are sold. It’s like a car dealership where the salesman claims a Ford Pinto can climb mountains—clearly false. Similarly, annuity companies can’t control every sales pitch. To sell Indexed Annuities, all you need is a state life insurance license. Many selling them have no background in managing real market assets. Be cautious, and don’t fall for sales pitches.

The Difference

A Fixed Indexed Annuity is a type of Fixed Annuity. The Fixed Annuity category includes Fixed Indexed Annuities, Multi-Year Guaranteed Annuities, Immediate Annuities, Deferred Income Annuities, and Qualified Longevity Annuity Contracts. All Fixed Indexed Annuities are Fixed Annuities, but not all Fixed Annuities are Fixed Indexed Annuities.

Are Fixed Indexed Annuities a Good Investment?

I don’t consider them investments. Annuities are contracts. A Fixed Indexed Annuity is a contract issued by a life insurance company. It’s a CD-type product. That doesn’t make it good or bad; it’s not a security or a market growth product. It’s a principal protection product, but not a "pie-in-the-sky" product.

Beware of sales pitches that sound too good to be true, like a 10% upfront bonus, market upside with no downside, or free long-term care. Bonuses are part of the overall contractual guarantee and should never be the sole reason to buy an annuity. Similarly, "free long-term care" is misleading—these riders are guaranteed issues and not comparable to traditional long-term care insurance, which requires underwriting.

Should You Consider a Fixed Indexed Annuity?

Maybe. If you want principal protection, CD-type growth, or future income, it could fit your portfolio. However, it’s crucial to understand it’s not a market growth product.

If you’re serious about Indexed Annuities, book a call with us. Go to The Annuity Man, and we can discuss your needs one-on-one. See you on the next Stan The Annuity Man blog!

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