Is an Indexed Annuity Fixed or Variable?

The question today is, is an Indexed Annuity fixed or variable? Short answer, fixed, but there's a lot more to it than just that. What I would like to do is go through what a fixed indexed annuity, Indexed Annuity, and a Variable Annuity are and tell you the differences between both. Then at the very end, offer you value for free. Value for free means a book, Fixed Indexed Annuity Owner's Manual. If you hang in there through the end of this blog, I'll tell you how to get my books for free.

‌Variable Annuities

‌Let's talk about Fixed Indexed Annuities and Variable Annuities. Variable Annuities are, in essence, a security, a stock, a bond, an ETF, etc. You must be licensed to sell that, just like a stock or mutual fund. A Variable Annuity was designed or developed around 1955 for tax-deferred growth. Inside of a Variable Annuity, there are what's called separate accounts. You and I call them mutual funds inside the Variable Annuity, but used outside of an IRA, that market growth can grow and compound tax deferred. That is a Variable Annuity. They have their place. I don't sell Variable Annuities because I only sell contractual guarantees, but if you're a person who can manage your own funds, that might be a good choice for you.

‌Indexed Annuities

‌An Indexed Annuity is not a Variable Annuity; it's a Fixed Annuity. It's not a security. It's a life insurance product designed in 1995 and brought to the public in 1995 to create enhanced CD returns. It's a little bit better than CD returns. Since 1995, historically, that's what it's done, even though that's not how it's sold. It's sold as market upside with no downside, etc.

‌Now that you know that an Indexed Annuity is not a Variable Annuity, let's focus on Indexed Annuities because I'm assuming that's why you're here. You want to understand why that banker or agent or the bad chicken dinner seminar guys are trying to sell you an Indexed Annuity and is it as good as it sounds? Let's be clear here. I'm not a huge fan of how they're sold and the pitches out there. The Indexed Annuity is a good product. It's a CD-type product. It's a principal protection product, but that's not how it's sold. It's sold with sayings like market upside with no downside, a free upfront bonus for signing, free long-term care benefits with no underwriting, all kinds of whistles and bells that sound good, and you're probably leaning in going, "Man, that sounds great." Well, if it sounds too good to be true, it is every single time with an annuity, but that doesn't make Indexed Annuities a bad product.

‌Limitations and Benefits

‌Let's go through the limitations and the benefits of an Indexed Annuity, where it fits, how it works, and things like that from a 30,000-foot view. Once again, I encourage you to get the book because I detail how everything works. Let's talk about the gains. Everyone's looking for a market upside with no downside. That's not what it was designed to do. It was designed to create CD returns, and the accumulation value engine on an Indexed Annuity is a call option. In English, that's a legal wager to say, "Hey, the market's going to go up, and I want to make sure that I capture that up."

‌Now, with an Indexed Annuity, they limit those gains. You're not going to get all of it. They have what they call caps, which is a cap, a limitation, a spread, which is a limitation. The annuity companies can change those rules at their discretion, but don't buy it for market upside, buy it for principal protection, or buy it for CD-type returns. If you have one of those anomaly years where it returns more than that, that's great, but understand that over time, the blended returns are a little bit more than CD rates, which is a good thing.

‌Income Rider

‌The other thing about Indexed Annuities that you can do, that I like them for, is a very efficient delivery system for what's called an Income Rider. An Income Rider is an attached benefit to a policy that you can use for future income needs. In essence, you have two calculations. You have the Indexed Annuity calculation, which is the accumulation value, and then the Income Rider value. It does have its place in a portfolio.

‌A guy called me the other day, and he said, "Stan The Annuity Man, I'm getting pitched this Indexed Annuity, and there's an index attached to it that I've never heard of in my life."

‌Backtesting

‌Now, a current trend in the Indexed Annuity sales world and the carriers are doing this; what they're doing is they're backtesting; they're creating an algorithm to backtest for a return. They're actually looking for a specific return. In other words, if you owned it 10 years ago, this would've been the return. Then they're taking that basket the algorithm produces and attaching funky names to it. That's the new thing in the business right now.

‌When Indexed Annuities first emerged, the S&P 500 was the key index. Currently, a couple of states are getting upset with these back-tested return scenarios that are being sold with these made-up out-of-air indices. They're saying that, and I don't know if this will go through because the insurance lobby is pretty tough; if the index has not been in place in the marketplace for over 10 years, then it cannot be used in an Indexed Annuity. There's a part of me that agrees with that because if you make indices up out of midair and then you tell a client, "Well, if you'd owned it 10 years ago, this is the return you would've gotten," and it's only been in place for a month, that seems a little bit off to me. I don't really like that. It perpetuates that salesy environment too-good-to-be-true situation with Indexed Annuities.

‌The limitations of Indexed Annuities really revolve around the misleading and overhyped sales pitches that are attached to too many of them. They're not a one-size-fits-all product. They're a principal protection product that creates CD-type returns, and you can attach an income benefit rider for future income needs. That's the solution. That's what they do. Indexed Annuities are not a Variable Annuity, it's a Fixed Annuity. It's a life insurance product. If you're looking for the accumulation value, if you want to get a quote and say, "Hey, what's the best accumulation value?" We'll show you the indexed options that are currently available out there that seem most favorable, with the understanding that you know that those can be changed by the annuity company on an annual basis, typically with Indexed Annuities.

‌Well, you also could say, "Stan, I'm not really as interested in the indexed side as I am in the Income Rider side that we can attach to an Indexed Annuity," we'll run that quote to you as well. Two different quotes, two different calculations, but just put your IQ hat on with the Indexed Annuity sales pitches that you'll hear, because if it sounds too good to be true, it is. Really, in my opinion, the Indexed Annuity industry should tamper down the hype and tell people the truth. Most people, if they understand it fully, will make an excellent informed decision.

‌We've taken a 30,000-foot view of indexed annuities, which is why you need to get my book. To get the book, all you need to do is click this link. You can download it for free, with no obligation and no hassles. If you want to quote and interact with us, please book a call. Thank you for joining me today. I'll see you next time.

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.