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Fixed Index Annuities (FIAs) are currently one of the most popular financial products and pushed by most financial professionals for their built-in high commissions.
FIAs were first introduced in 1995 as a principal-protected life insurance product that provided CD type returns. Since that time, that is exactly the returns they have produced. Unfortunately, that is not how too many advisors pitch them. They are promoted as a stock market return product that is based on the performance of an index call option. However, that interest credit return applied to that call option is limited on the upside.
FIAs are issued by life insurance companies and are not securities. They are regulated at the state level as a fixed annuity.
Below are some of the key features that you will find with FIAs:
*No annual fees
*Can be used in an IRA, Roth IRA, or non-IRA account
*Potential to outperform CDs & MYGAs (not the stock market)
*100% principal protection
*Gains permanently locked in
*Gains grow tax-deferred in a non-IRA account
*Index Option choices can be changed
*Guaranteed Minimum Return
*Penalty-free withdrawal options
*Income Rider benefits can be attached at the time of application
*Some attached Income Rider benefits provide Confinement Care
*Can be converted to a SPIA for lifetime income
A Fixed Index Annuity (FIA) is a deferred annuity that protects you from market volatility because it’s a fixed annuity. A call option on a market index (like the S&P 500 index) is the typical underlying strategy. The upside return potential is limited by contractual levers like “point to point,” “participation rates,” and “spreads.” If the index performs well, you can lock in those partial gains permanently on the contract anniversary date. Currently, there are over 700 different index option choices available, with over 45 different indices to choose from. However, they are all pretty much designed to create CD (or a little better) returns.
A FIA is a different type of annuity than a market return driven Variable Annuity (VA). FIAs are designed for principal protection and CD type returns, where VAs were developed for tax-deferred growth using mutual funds (i.e. separate accounts).
The majority of these indeed annuity contracts have a surrender charge schedule for a specific period. Most FIAs have liquidity provisions that allow you to take money out annually and penalty-free if needed. Also, FIAs can provide a death benefit from the accumulation value or an attached benefit rider.
Income Riders attached to FIAs are an efficient way to deliver a lifetime income guarantee that can start at a future date of your choice. Income Riders can be added to the policy at the time of application, and most come with an annual fee for the life of the policy. That annual fee is taken out of the accumulation value, not the income rider value. Those are two separate calculations within a FIA policy. Income Riders are, in essence, a phantom account and monopoly money that can only be used to calculate your first lifetime income payment. That’s the limitation, but the benefit is an income stream that you can never outlive...your own personal pension.
Some FIA Income Riders can also provide confinement care or enhanced benefit payments if you become ill. There are specific rules within the FIA policy that layout how to qualify for these benefits, and should be fully explained by your advisor (i.e. Stan The Annuity Man) before signing any paperwork. The good news about these types of riders is that they are “guaranteed issue.” That means no underwriting or medical tests are needed. However, in a perfect world, these types of riders should only be used as supplemental coverage, not primary coverage. But if you can’t qualify for Traditional Long Term Care, this is the only coverage option that you may have.
The biggest issue with Fixed Index Annuities (FIAs) is how they are sold. Many advisors are truthful about how the product works, but too many are not. FIA sales pitches can sound “too good to be true,” but they are not. That doesn’t make FIAs bad products. The problem is the sales message and trying to regulate it from an industry standpoint. “Market upside with no downside” is a typical pitch with non-guaranteed proposal numbers to convince the buyer that the perfect product exists. It does not. I always tell people that if some of the over-hyped FIA sales pitches I hear were true, then the FED would just buy FIAs. Spoiler alert, the FED owns no FIAs.
The way that Stan The Annuity Man primarily uses FIAs is to deliver the Income Rider guarantees for a future lifetime income. When someone wants an “Income Later” quote, we use our proprietary annuity calculators to run Income Riders and Deferred Income Annuities (DIAs). Those are the two annuity strategies that contractually solve for future pension type income needs. Sometimes Income Riders have the highest number, and sometimes DIAs have the highest number. We quote both strategies and ALL carries to find the highest contractual guarantee for your specific situation and goals.
I also like FIAs because they fully protect your principal and any index option gains are permanently locked in on each contract anniversary date (with most FIA structures). FIAs also work well in conjunction with MYGAs (Multi-Year Guarantee Annuities) to create a fixed annuity strategy ladder. MYGAs are the annuity industry’s version of a CD, and FIAs are CD type products as well. Both FIAs and MYGAs provide full principal protection, and FIAs without attached riders have no annual fees. Remember that FIAs are commodity products and should be shopped with all carriers. There is not one FIA that is better than the other, in my opinion.
Before buying a Fixed Index Annuity (FIA), you need to read the FIA Owner’s Manual, request a quote, and schedule a call with Stan The Annuity Man to have a full discussion. There’s no obligation or cost for any of these services, because it’s important for you to fully understand FIAs before signing any paperwork. Don’t buy the sales pitch dream because you are going to own the contractual realities of that FIA policy. And if it sounds too good to be true...it is...every single time with FIAs. There are no exceptions to this rule, so connect with Stan to get the brutal truth about FIAs and find out if this strategy is appropriate and suitable for your specific situation.