Back Tested Annuity Returns - Index Annuity Scams
Today's topic is about indexed annuity scams and these back-tested return numbers that you see that seem so good. But this is one of the situations, and one of the scams that drives me crazy.
Let's talk about index annuities. First of all, a disclaimer. I like them. I like Fixed Index Annuities. Why? Because they're principal protected. They don't have any fees if you don't put an income writer on them. We use them primarily as a cost-effective and efficient delivery system for income riders, future pension guarantees, and lifetime income guarantees. From an accumulation value standpoint, index annuities were put on the planet in 1995 to compete with CD or MIGA type returns, that 2% to 4% return. But that's not how they're sold at the bad chicken dinner seminar.
Don't Swallow the Pitch
Don't swallow the pitch because they're going to pitch you an index annuity. They're going to say stuff like, "Market upside with no downside. Market participation with principal protection." Boy, that sounds good. Doesn't it? Do you know what else sounds good? Taking a pill and having six-pack abs. That sounds good too. And that's not going to happen either. No one's come up with market upside with no downside. Because if they did, that's all everyone would buy. The Fed, Goldman Sachs, JP Morgan, UBS, and Morgan Stanley. That's all they'd buy. If you could protect the principal and get market returns, that's all you'd do. But it doesn't work like that. Ever. It just doesn't. You have to understand that if it sounds too good to be true, it is every single time, with annuities and especially index annuities.
You're buying the dream and you're going to own the contractual reality.
The Current Marketplace
Now, what's happening currently in the marketplace at the time of this taping? I don't like with index annuities. What they're showing are back-tested numbers. So, in other words, you go to the bad chicken dinner seminar, and they show you the, "Well, if you owned this ten years ago..." That's a back-tested return number.
Unfortunately, with a lot of index annuity proposals that the companies put out, they have that in there. In some states, it's illegal. I wish it would be illegal in all states. That's like saying, "Well, Stan, if you'd have done 100 sit-ups every day and eaten right, and walked every day, you'd be skinnier, and you'd have six-pack abs." That's a back-tested return number. They're looking at ten years ago when interest rates were at a different level when the crediting rates were different. When I say crediting rates, I'm talking about those participation rates, cap, spreads, and the limitation on the upside with an index annuity. All of that was different.
So they say, "Well if you owned it ten years ago, you'd have made this." Never, ever make a decision on the potential, hypothetical, theoretical, projected, hopeful agent return scenario, unicorns chasing the butterflies, ever. Make it on the contractual guarantees of the policy. What's the contractual guarantee of an index annuity? Very good question. It's the principal protection of the policy. That's it. That's the guarantee. You're not going to lose money with a Fixed Index Annuity. It's fixed. It's a fixed product. It's not security. It's issued at the state level by a life insurance company.
But here's the other thing driving me crazy. Currently, at the time of this taping, look at the date, there are over 700 index option choices to choose from with index annuities. 700. That's a lot. Spoiler alert, most of those index option choices are designed to create the same level of returns. So you're almost throwing a little bit of a dart. I know your agent's going, "Well, I've done my research, and this index annuity option strategy is the best."They have not. It's just It doesn't happen, but this is what's happening now.
Companies are creating indexes, or we can call them indices, out of mid-air. You've never heard it. They'll make up a name after they backtested for a return. So the index has been around for, say three months or six months and then they’ll say “if you'd have owned this index ten years ago, this would've been your return over that ten year time period." It's only been around for three months or six months. How do you do that? You can't do that. You're buying the dream and you're going to own the contractual reality.
Here's the other thing you have to understand that's not told to people when they're buying index annuities. Let's just say, for instance, you buy a seven-year surrender charge index annuity or a ten year surrender charge index annuity. And there's a one-year call option on, let's just say, it's normal. It's on the S&P 500. Or let's just say it's one of these made-up ones, the unicorn index. And you own that one-year option on the unicorn index. What do you really own? You own a 10 year surrender charge or a seven year surrender charge, depending on the product, with a one year guarantee. Let me repeat that. You have a 10 year surrender charge product with a one year guarantee. And oh, by the way, spoiler alert, the annuity companies can change the crediting method, meaning that one year option cap spreads, participation rates, hold for this one, at their discretion. They can change the way that gain can be calculated at their discretion. Meaning they're not going to talk to you. They're not going to talk to me. They're just going to change it.
Chasing the Unicorn
So when people show back tested numbers, and they're showing what would happen if you'd owned it 10 years ago, you really should say, "Really? How about the one year?" Because they're going to change it year one, year two, year three, year four, year five, year six, year seven, year eight, year nine, year 10. So don't fall for that. Don't fall for the pie in the sky stuff.
And by the way, index annuity salespeople, they typically just sell index annuities. Ask them this. Do you sell immediate annuities, Deferred Income Annuities, Qualified Longevity Annuity Contracts? Do you sell Multi-Year Guarantee Annuities? What do you sell? Or do you just sell index annuities? What percentage of your business is just selling index annuities? And if that person says over 50% or some crazy high number, then they're just slinging index annuities. They're not asking you the question, which is what do you want the money to contractually do? When do you want those contractual guarantees to happen? Or they're not using my PILL acronym. Principal protection, income for life, legacy, long term care, confinement care. That's the PILL. They're not asking you if you actually need an annuity and what you want it to contractually solve for. They're trying to show you the back tested numbers to make you feel that, hey, this is great. I'm going to get something that my neighbor doesn't have. I'm going to get something that's unique. I'm going to get something that's going to outperform the market yet protect my principal.
Please don't be that stupid. And if someone says to you the following, "Yes, and also you're going to get an upfront bonus for signing the paperwork." They're going to give you this free money. Upfront bonuses, I call it candy for the stupid. Please don't be that person. Please don't think, and nudge your spouse or partner and say, "Well, they're giving us free money." No, they're not. There's not an annuity CEO that wakes up in the morning and goes, "You know what? I'm going to give away free money today. I think I'm going to call it a bonus. I'm going to give it to everyone who signs the contract." No, it's part of the overall contractual guarantee of the index annuity policy.
So Fixed Index Annuity scams, there's a lot of them out there. Are they too good to be true? Yes. Are they pretty darn good? Yes, they are. They're good products if you understand them for the realistic expectation of returns that they will provide.
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.