Fixed Indexed Annuities: What, When, and Why Should You Buy One

Let’s talk about Fixed Indexed Annuities. What are they? When should you buy one? Why should you buy one? What’s all the hype? Why is everyone I meet trying to sell me a Fixed Indexed Annuity? Good question. I’m going to go through Indexed Annuities in a series that you’re going to find fantastic if you’ve ever been pitched one, considering one, or even if you already own one. But regardless, I’d like you to download my Fixed Indexed Annuity Owner's Manual. It’s a book I’ve written along with five other owner’s manuals, and you can download them for free so you can fully understand what these products are all about.

Schedule a Call

All right, here’s the shameless props. Number one, the phone. You should go to The Annuity Man and schedule a call with us if you want to discuss Fixed Indexed Annuities without the sales pitch. It’s just my team and you, one-on-one, talking and getting your expectations in line with the contractual realities. The other shameless prop is this calculator. If you go to The Annuity Man and talk with us, we’ll run quotes for all Indexed Annuities to find the best one for you, whether you just want a standalone Fixed Annuity or one that also includes an Income Benefit Rider.

We can do both, but the bottom line is to work with us one-on-one in a non-pressure, non-salesy environment. Yes, I’m the top agent in the country, licensed in all 50 states, but with these products, like all annuity products, they are contracts, and you have to fully understand that contract.

The What, When, Why of Fixed Indexed Annuities

My mantra is: You own an annuity for what it will do, not what it might do. Now, with the Indexed Annuity product, it’s a little different because the “will do” is the principal protection. A Fixed Indexed Annuity is a fixed annuity issued by a life insurance company and approved at the state level. It’s not a security. It’s not a market product. You don’t need a securities license to sell it.

You can get your license in some states in one week to sell it. I’m not sure that’s a good thing, but it’s just reality. Fixed Indexed Annuities were introduced in 1995 to compete with CD returns. Since that time, the return scenarios you typically see reflect the same competition as CD returns.

How Do Fixed Indexed Annuities Work?

So, how does a Fixed Indexed Annuity work? In another part of this series on Indexed Annuities, I’ll go through all the caps, spreads, participation rates, and other details just so you understand all of that. But the bottom line with the Indexed Annuity return scenario is that it’s based on a call option, and you get a limited portion of that return. That doesn’t mean it’s a bad thing. The return can lock in permanently, but for the “what, when, and why” of owning an Indexed Annuity, I personally like using them as a very efficient delivery system for something called an Income Rider.

At the time of application, most Indexed Annuities allow you to attach an Income Rider guarantee. Now, visually, how it works: if you draw a line down a blank sheet of paper, on one side is the index option side — that principal protection. But we don’t know what the return will be on an annual basis. On the other side is the Income Rider side, which is the guaranteed income benefit.

There are two separate calculations. The left side is the real money side — meaning, if you wanted to cash out, that’s what you could cash in. The Income Rider side is more like monopoly money, a phantom account that can only be used to calculate lifetime income. Some also use it for death benefits or confinement care, but we’ll get into that later in this series. What you need to understand is that this isn’t too good to be true, like you hear at the bad chicken dinner seminars. It’s not too good to be true, as you hear on Saturday morning radio shows or TV commercials.

You need to put your thinking cap on and understand that annuity companies have big buildings for a reason. They’re not just going to give something away. They price it as pro-customer, but it’s not too good to be true.

The Reality of Annuities

To drive the point home more brutally, as they say, annuities are contracts. Yes, I made a sign for it. That includes Fixed Indexed Annuities. So, you need to understand the contractual guarantees of that policy. If you’re interested in a specific Indexed Annuity or we talk on the phone and you say, “You know what? I kind of like that one,” we can send you a specimen policy on that product and the application if you want to see them before making a decision.

Another point I like is to buy the steak, not the sizzle. That’s a big one with Indexed Annuities. You’re going to hear some of the best sales pitches of all time. Let me give you one I got the other day. A guy called me up and, as I wrote it down, he said, “Stan, this Indexed Annuity...” Let me break this down section by section. The guy said, “I’m going to get a 10% bonus for signing up.” Cut. What does that mean? That doesn’t mean there’s a philanthropist at an annuity company who’s trying to give you money just because they love you. No, it’s part of the overall contractual guarantee. Sometimes, the upfront bonus will increase the contractual guarantees you’re looking for, and sometimes it won’t.

Debunking Common Sales Pitches

Here’s the next part. He said, “You’re going to get market growth with no downside.” Cut. That’s not true. You’re going to get no downside, but most of the time, with Indexed Annuities, they’re designed to compete with CDs. So, the vast majority of the time, you’ll get CD-type returns. Will there be some years it might be a little better than others? Maybe, but the blended return is generally CD or a little better than CD returns. If you go into Indexed Annuities thinking that it’ll be a good product for you.

Here’s another one. “You’re going to get free long-term care with it.” Cut. First of all, long-term care is a separate product. It’s a healthcare product, not an annuity product. What they’re referring to is confinement care, meaning if you get sick and, in some cases, can’t do two of the six daily functions of life, they’ll increase the payment. In other words, they’ll give your money back quicker when you get sicker.

So, let’s break that sales pitch down again. “You’re going to get a 10% upfront bonus, you’re going to get market upside with no downside, and you’re going to get free long-term care.” Well, I’ve just debunked all of that right there. If it sounds too good to be true, it is — every single time. That doesn’t mean those specific things and that sales pitch are bad, but they need to be explained for the factual and contractual guarantees they give you.

The Truth About Fixed Indexed Annuities

Be careful with Indexed Annuities, because many agents are going to tell you what you want to hear. They’re good products if used properly. In my opinion, if you say, “Stan, I want principal protection and maybe a little better return than a CD,” and you’re okay with maybe a zero in some years, then an Indexed Annuity works. Or if you say, “Stan, I want a lifetime income stream in the future, five, seven, 10, or 15 years from now,” then we’ll quote Income Riders attached to Indexed Annuities that provide that contractual guarantee.

In those specific situations, Indexed Annuities fit. We will quote other products as well to ensure you find the highest contractual guarantee for your specific situation. But in essence, Fixed Indexed Annuities are not too good to be true. They’re pretty darn good when you understand them for their contractual guarantees and the transfer of risk benefits, they offer.

Fixed Indexed Annuities vs. Bonds

Another thing to know about Indexed Annuities: They’re not bonds. A lot of people pitch Indexed Annuities and say, “This works like a bond.” No, it doesn’t. I’ve worked in the industry for a long time. I used to manage bonds at firms like Morgan Stanley, Dean Witter, Paine Webber, and UBS. Bonds have a specific coupon that you can peel off without touching the principal, and they’re tradable. Comparing Indexed Annuities to bonds is pushing the envelope. It’s an apples-and-oranges comparison. A Fixed Indexed Annuity is a CD product, period.

Conclusion

If you’re looking at a Fixed Indexed Annuity, you should also look at a Multi-Year Guarantee Annuity, which is the industry’s version of a CD. Both Fixed Indexed Annuities and Multi-Year Guarantee Annuities work very well together because they protect your principal and are fixed annuities. And with Indexed Annuities, if you don’t attach a rider, there are no annual fees. No fees on MYGAs, either.

If you want full principal protection and CD-type returns, then your two choices are Fixed Indexed Annuities and Multi-Year Guarantee Annuities. They work well together. But when you hear all this stuff about Indexed Annuities, put on your thinking cap. These are contracts. They’re CD products introduced in 1995 to compete with CDs. That’s exactly what they do. They’re also very efficient delivery systems for Income Rider guarantees if you want future income.

At the end of the day, talk with us so you’re not buying the dream, but the contractual reality. We can match you with the right Indexed Annuity for your specific situation.