Fixed Index Annuities Pros and Cons
Today's topic is Fixed Index Annuities, pros, and cons. I'm telling you, anytime the market's gyrating a little bit, and now that COVID is lifted a little bit, you're starting to get those invitations in the mail to go to the local, very nice, high-end restaurant to have the steak dinner or chicken dinner or whatever you decide to order. And then, hear a sales pitch on the scariness of the markets along with market risks. That's an Index Annuity sales pitch that you're getting ready to swallow literally and figuratively. I encourage people to go to the bad chicken dinner and steak seminars but swallow the food, not the pitch.
My mom in St. Augustine, Florida, who's 83 years old, is what I call a professional plate licker. She is a professional. She attends these bad chicken dinner seminars three to four times weekly. She'll call beforehand. She goes, "What are you having for dessert? Because me and T," that's my dad who's passed away, "we really don't like specific desserts. We like banana pudding, and we like..." She'll drive them crazy. But she'll attend these seminars, eat the food, and hear more sales pitches than I have. And then she'll call me every time and say, "This gentleman, he seemed really nice. He showed me pictures of his children and said, I could get a 25% upfront bonus for transferring my money," and I shake my head. Of course, I do not give my mom the Fixed Index Annuities pros and cons because she will only hear me if I include my daughters in that explanation because she only hears something if you're talking about the grandchildren. I'm digressing, but you know what I'm talking about.
Let's talk about the pros of Fixed Index Annuities. They were put on the planet in 1995 as a very good efficient solution for normal CD-type returns, which we're typically aware of. And we're talking about two to 4%-ish. Principal protected. That's a positive. You're never going to lose a penny. Another pro of an Indexed Annuity is the index option strategies. By the way, I've written a book on that, and it's free! I've done videos and detail on the index option strategies: the caps, the spreads, the participation rates, and all that great stuff. The bottom line is they lock in permanently. On the contract anniversary date, it will lock in permanently if you do have a gain. That's fantastic. Another pro of Index Annuities, you can attach an Income Rider at the time of application for a Lifetime Income stream in the future. You can set it up for yourself or joint with a spouse. In addition, another pro of Index Annuities is that these Income Riders sometimes come with what's called confinement care, or enhanced benefit, to them which means that if you need specific in-home or nursing home care. Those are guaranteed issues and can be attached to the income rider.
There are some great things and some excellent pros about Index Annuities. But here's the problem. The cons always overshadow those, and the cons and the negatives are self-inflicted in the Annuity industry. Most of the negatives with Index Annuities revolve around a sales pitch that's either over-hyped or borderline fraudulent and misleading. Most of the time, with Index Annuity sales pitches, with agents that sell that, or they're just pitching that, they're saying stuff like market upside with no downside or market participation with Principal Protection. That's absolute garbage. They were not put on the planet for market returns. Index Annuities are not securities. They're life insurance products issued and approved at the state level. There's no SEC oversight. And to sell an Index Annuity, at the time of this taping, you must pass a state life insurance exam with a score of 70.
I was doing a podcast recently with a brilliant gentleman, one of the smartest people in the Annuity industry. His name is John Olsen. And by the way, I have a podcast, Fun with Annuities®, that you need to check out. But his comment was he believes there needs to be separate licensure and testing to sell Index Annuities. I completely, 100% agree with him.
Now, the other part about the cons, the negatives, I hate to say the word cons. Let's say negatives. The negatives about Index Annuities is that the sales pitch goes something like this. Currently, at the time of this taping, a couple of companies are giving 25% upfront bonuses for signing the paperwork. Let's stop there. Let me explain that. There are a hundred pennies in the dollar. No, there are no philanthropists at annuity companies. That's not free money, and it's just priced in. Take this the right way or take this the wrong way. Index Annuity upfront bonuses are candy for the not-so-smart people. It's like if I went to a car dealership and walked in, and the guy says, "I'm going to show you this car." I'm like, "Yeah, great. Show it to me." "Look at this stereo. Look at this. It's got 17 speakers, and it's loud." I'm like, "I'll take it." Take what? I'm going to take the car. I'm going to buy it. Buying an annuity for a bonus is like buying a car for the stereo system. It's stupid. But many agents will talk about upfront bonuses, combining them with market upside with no downside, which is not true. And they'll just keep going. And then they'll show you back-tested numbers. That's another negative.
Another negative that drives me crazy is agents and advisors will say, "Well, if you'd have owned this specific Index Annuity in the last 10 years, you'd have gotten this." That's garbage. And in some states, it's illegal even to do that, and it should be illegal in all states because things were different when those annuities were priced. And even better, some of the indexes sold now weren't even around 10 years ago. Even though they're saying, "Well, if you'd owned it 10 years ago," and wait a minute, this index has only been around six months, how could that be? So, there's a lot of bait and switch. There's a lot of misinformation. There's a lot of 30,000-foot view sales pitches without getting into the weeds with Index Annuities. The negatives of Index Annuities revolve around the sales pitches and the lack of explanation by the advisor or the agent. As I always tell people, if you cannot explain the product you're buying to a nine-year-old, then don't buy it—no offense to nine-year-olds.
I got a call the other day. The gentleman put half a million dollars in an Index Annuity, and I'm not going to go into the company. It doesn't matter because they're all designed to produce the same rate of return. I said, "Can you explain the Index Annuity to me? Can you explain how the call options work? Can you explain how they change the rules every year? Can you explain the Income Rider fee? Can you explain any of that?" He could not. He put half a million dollars into something he could not explain. You can't do that. And if you're talking to me and we're talking about Index Annuities, and I feel like you need to understand it fully, I'm not going to allow you to sign the paperwork. Don't believe me? Try me.
Index Annuities are good products. They're not too good to be true, but they're pretty good if you fully understand them and how they work. But that's where the rubber meets the road. So, the pros are, again, the positive of Index Annuities are good. Principal Protection, locked in gains. You can attach Income Rider for pension needs, and some of those Income Riders come with built-in guaranteed confinement care and enhanced benefits. But the negatives revolve around the sales pitches. And the problem with that, Index Annuity people know they can sell you on fear, and they can sell you on greed. They can either scare you into it or greed you into it. Just don't be that person. You're smarter than that, so don't fall for it.
My Plea to the Annuity Industry
Here's my soapbox plea to the Annuity industry. Most of the agents mean well; they don't understand what they're selling and haven't researched what they're selling. And me and John Olsen on the podcast, we're talking about that, that most agents have never, they don't understand what they're selling. They're selling a 30,000-foot view. But let's put the agents and advisors aside for a while. I'm speaking to the Annuity industry. That's who I'm pointing at right now. All you carriers, the NAIC, everybody. Here's my plea. Stan The Annuity Man®, America's annuity agent®. I'm on your side and making this easier for you, but I need you to make it easier on the consumer. I need you to force the carriers to create simplistic Index Annuities that are easy to understand. That way, when the person gets the policy in the mail, they can read it and understand it. Strip all the crap down; strip all the whistles and bells out of that. Make the Index Annuity story a simple one, an easy one, that everyone can understand. Please do that. You're talking about a no-brainer from an industry standpoint, a no-brainer from a sales standpoint, a no-brainer from a marketing standpoint, is to make things simple.
As we all know, Steve Jobs, the former CEO and head of Apple, who passed away, said something that applies to the Annuity industry. Simple is complex, and it's very complex to make things simple. We always try to make everything simple for what we do at The Annuity Man®. What I write is simple; what I say on video is simple. The podcasts are simple, and the calculators are simple. We're making that simple so people can make a good decision.
Index Annuity carriers out there, I know you're reading this. The Index Annuity industry out there, I know you're reading this as well. Let's, as an industry, make these products simple because if you don't, it's going to come back to bite the industry. I'm not saying from a litigious standpoint, but from a sales standpoint, a goodwill standpoint, and a pro-customer standpoint. The Fixed Index Annuity story is a good story. It's a Principal Protection story and better than a CD-type return story. It's a Lifetime Income guarantee with a pension story. And it's a story that fits in many people's world, with 10,000 baby boomers hitting age 65 every day. Here's the thing. Let's make that story simple and easy to understand. It sounds simple, but for whatever reason, it's not.
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.