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Are Fixed Index Annuities for You?

Stan Haithcock
April 28, 2024
Are Fixed Index Annuities for You?

Hi there. Stan The Annuity Man, America's annuity agent licensed in all 50 states. I'm so glad you joined me. Please do me a favor and hit the subscribe button on our YouTube channel. We make a lot of informative videos that are not salesy. If you just stumbled across this, welcome. If you're one of our 12,000-plus subscribers at the time of this blog, thank you so much. We really enjoy doing these for you. And this is a topic today that's going to inform a lot of people. It's going to save a lot of people from bad decisions. Hopefully, it will help the industry. I like doing that because this product is causing some issues. And the topic is, are Fixed Index Annuities for you? Should you own one? Should you consider owning one?

Now, like all annuities, they're contracts, and we need to talk about what those contractual guarantees do with the policy. But this is the Fixed Annuity Type that gets over-promoted, over-sold, over-promised, and over-hyped for a myriad of reasons. We will go through all that in a rational, non-yelling, non-emotional way. I know you're saying, "Really, Stan," Yes, in a non-emotional way because it's very important right now for you to understand this. Are Fixed Index Annuities suitable and appropriate for you? Should you consider them? Let's get into that.

Brief History

Let's do a bit of a history lesson. Fixed Index Annuities were first put on the planet in 1995 as a solution and a competitive product against CDs, certificates of deposits. In 1995, the industry wanted to create something that might get a bit better than CD returns but not a market return product. Now, that's where the problem starts right there. Too many agents and advisors are promoting Fixed Index Annuities as market products. They're not. They're life insurance products. They're Fixed Annuities. They're not market products. They're not overseen by the SEC or FINRA. But I will tell you, if the sales pitches continue the way they are, they will be because you have the bad chicken dinner and the good steak dinner seminar where people talk about market upside with no downside and market participation with principal protection.

Income Riders

All that sounds fantastic. And my comment to that is if they were that good, that's all Goldman Sachs and JP Morgan and our government would buy if you got market upside with no downside. And some of the sales pitches are crazy, "Well if you'd owned it 10 years ago, look at these juice numbers you'd own." In many states, you can't even show those numbers. What you need to know about the Index Annuity world is it's not a bad product. We're not against Index Annuities. We primarily use them at this point in time for the Income Riders that you can attach to Index Annuities at the time of application to solve for income in the future. Income Riders have a contractually guaranteed lifetime income stream. You could set up single life or joint life, but it rides on top of the Index Annuity.

Caps, Spreads, and Participation

Now, Index Annuities can be very complex. The strategies they use are index options. We're getting into the weeds, and the limitations on the upside are surrounded by three things: caps, spreads, and participation rates. Now I've done videos on caps and spreads and participation rates. I've written a book on Fixed Index Annuities, a Fixed Index Annuity owner's manual. You can read that for free on my site at The Annuity Man. I've done a ton of videos on Index Annuities and the intricacies of them. But what you need to understand about the Index Annuity space, and when I say most Index Annuities, not all, most can change how the potential gains are calculated every single year at their discretion, those caps and spreads and participation rates. In other words, if you bought a ten-year surrender charge, you're really buying a one-year guarantee with a ten-year surrender charge because years 2, 3, 4, 5, 6, 7, 8, and nine and 10 can be changed at the discretion of the annuity company.

Those are called renewal rates, which brings me back to my whole premise about annuities in general. If you cannot explain the annuity to a nine-year-old or a group of 2nd graders, no offense to either one of those, whether it's a group of 2nd graders including their teacher and a nine-year-old, then never buy it. If you cannot explain it, don't buy it. If you don't understand it, don't buy it. Who am I echoing right there? Warren Buffett. That's what Warren Buffett does. He doesn't buy anything he doesn't understand. He said, "Well, was that true?" Yeah, he owns Coke, he owns candy, he owns Aflac, he owns those types of companies. He might not own them now, but he used to. But the point is he understands how they work. Most agents and advisors showing you Index Annuities could not explain the caps, the spreads, and the participation rates.

The Conundrum

I'm going to tell you this. If it sounds too good to be true, it is every single time. The good news about Index Annuities is if you do have a gain that you achieved during that contract anniversary and it's locked in, it's locked in permanently. Great, okay, but here's the conundrum, the rub is at the time of this blog. There are over 750 index option choices now. 750, and they're all pretty much designed to create the same type of return. That doesn't make the Index Annuity space bad. If you go into an Index Annuity and say, "I'll be fine if I get a two to 5% return, I'll be fine with that. I'm happy with that," then you'll like them. But if you go into an Index Annuity and the sales pitch is you're going to get seven to nine to 10% every year, year after year after year, you're not going to be happy. Because that's hedge fund type, that's private equity type returns, that's family office type returns. All right? And with those types of entities managing money, there's no principal protection. They're taking risks to get those returns. You have to be smart. You can't be the rube at the table. You can't be the sucker at the table. So, are Index Annuities right for you? They might be if you need income later and would attach an Income Rider to it. They might be if you want two to 5% return, and you're okay with that. If you get more, great, super, but that's the average. But don't go into these thinking you have one-upped your neighbor. You found the perfect product that no one else knew about. No, everyone knows about it. They've been out since 1995.

Upfront Bonuses

The other thing I'm going to warn you about is this. If someone approaches you with an Index Annuity and leads with, "Oh, by the way, if you sign the paperwork, you're going to get an upfront bonus," you can't be that stupid. Please tell me you're not that stupid. There are no philanthropist annuity companies. These are for-profit life insurance companies that issue the Index Annuity. There are a hundred pennies in the dollar. If they're giving you an upfront bonus, there's a catch. They're taking something away from the policy. That doesn't make it bad. And when we quote Income Riders, remember the Income Riders that are attached to the Index Annuities; when we quote those, we quote all carriers that include bonuses, not bonuses. It doesn't matter to us. It's all part of the contractual guarantee. But please don't put any weight on that upfront bonus. I call upfront bonuses, take this the right way, candy for the stupid. Because if you are that stupid to believe that you're getting free money from a life insurance company, then you're the rube that that agent or advisor is looking for.

Please don't be that stupid. Please don't be that gullible. Buy an annuity for what it will do, not what it might do. And if we're looking at the contractual guarantees of the policy and that upfront bonus is just part of the overall contractual guarantee, then that's fine. But don't call us and say, "Well, I just got a 25% free money upfront bonus." No, you got taken. You got lied to; you got misinformed. I'm not say lied to. Misinformed. You believe you're getting something you're really, really not. I just need you to put you on your realistic expectation hat. When it comes to all annuities, there are many different types. Index Annuities are fantastic if you understand that they're a CD product that you can use for principal protection and lock in a gain if you get it. You might not get it, but if you do, it's locked in, and you can attach an Income Rider to that Index Annuity for lifetime income.


Now, once you say, "Stan, I want an income down the road," then we're going to shop all Income Riders. The Index Annuity is irrelevant. And in fact, if you say, "Stan, what's the best Index Annuity," there is no best. I know that there are agents and advisors, though, who argue against that. But I think one of the problems we're having in the industry right now is that commissions drive the recommendation too many times. Commissions are built into all annuities, whether an Immediate Annuity, Deferred Income Annuity, Qualified Longevity Annuity Contract, Multi-Year Guarantee Annuity, Index Annuity, or Variable Annuity; it doesn't matter. They're all built in. You never see the commission. It's paid from the reserves, but Index Annuities have historically been one of the higher commission products.

But that's the reason that it seems like, and I get these calls all the time, "Why is every single person locally trying to sell me an Index Annuity Stan? Why is that? They're not listening to me." That's, unfortunately, probably the reason. Maybe it is, perhaps it isn't. There are other reasons, such as incentives to sales and things like that, trips, and all that stuff that I just really do not like; I wish the industry would get rid of it, but just be careful out there.

If I can say one thing, be careful when it comes to Index Annuities. Own an annuity for what it will do, not what it might do. Do not believe the sales pitch. Do not believe the back-tested numbers they show you. Do not fall for the upfront bonus. Buy it for the principal protection. Buy it for a CD-type return and buy it if you need lifetime income by attaching an Income Rider. We have no problem with Index Annuities. What we have a problem with is the way that too many of them are pitched and sold. Be careful out there. Go to The Annuity Man. Schedule a call with us, and I'll see you on the following Stan The Annuity Man blog

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