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Fixed Index Annuities Pros and Cons (TAM Classic)

Stan Haithcock
June 16, 2024
Fixed Index Annuities Pros and Cons (TAM Classic)

Hi there. Stan The Annuity Man, America's annuity agent. I'm so glad you joined me for today's topic, Fixed Indexed Annuities Pros and Cons. I'm telling you, anytime the market's gyrating a little bit, you'll start 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. You'll then hear a sales pitch on the scariness of the markets, market risk, and all this stuff. That's an Indexed Annuity sales pitch that you're getting ready to swallow, literally and figuratively. So, before you do that, I always encourage people to go to the bad chicken dinner seminar or the steak seminar and swallow the food, not the pitch.

‌My mom in St. Augustine, Florida, is what I call a professional plate licker. She goes three to four times a week to these bad chicken dinner seminars. She'll call beforehand, and she goes, "What are you having for dessert? We like banana pudding, and we like..." And she'll just drive them crazy, but she'll attend these seminars. And she'll eat the food, and she's heard more sales pitches than I have. And then she'll call me every time and go, "This gentleman seemed really nice. He showed me pictures of his children, and he said I could get a 25% upfront bonus for transferring my money," and I want to jump off a building. Now, of course, I do not give my mom the Fixed Index Annuities pros and cons because she won't hear me unless I include my daughters in that explanation. She doesn't hear anything unless you're talking about the grandchildren. I'm digressing, but you know what I'm talking about.

‌The Pros

‌Let's talk about the pros of Fixed Index Annuities. They were put on the planet in 1995 as a very efficient solution for normal CD-type returns. The ones that we're typically aware of. We're talking like two to four percent-ish. Principal protected. That's a positive. You're never going to lose a penny. Another pro is the index option strategies, and by the way, I've written a book on that. Get the book. I've made videos and provided details on the index options strategies, the caps, the spreads, the participation rates, and everything else. The bottom line is they lock in permanently.

‌So, on the contract anniversary date, if you do have a gain, it will lock in permanently. That's fantastic. Another pro of Index Annuities is that 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 the spouse. In addition, another pro of Index Annuities would be these Income Riders sometimes come with what's called a confinement care or enhanced benefit to them, meaning that if you need specific in-home or nursing home care, whatever, and there are specific rules, I don't want to get in the weeds with that, those are guaranteed issue and can be attached to the Income Rider. So, there are some great things and some great pros about index annuities. But here's the problem. The cons always overshadow those, and the negatives are somewhat self-inflicted in the annuity industry. Most of the negatives with Index Annuities revolve around a sales pitch that's either overhyped or borderline fraudulent and misleading.

‌Sales Pitches

‌Most of the time, with Index Annuity sales pitches with agents that sell that or 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 blog, you have to pass a state life insurance exam. And I think score a 70.

‌I recently did a podcast with a very smart gentleman, one of the smartest people in the annuity industry. His name is John Olsen. By the way, I have a podcast called Fun with Annuities that you need to check out. However, he commented that he believes there needs to be separate licensure and testing to sell Index Annuities.

‌Upfront Bonuses

‌I completely agree with him. Now, the other part about the negatives is that I hate to say the cons, let's say the negatives. The negatives about Index Annuities are the sales pitch, which goes something like this. Let's write that at the time of this blog, there are a couple of companies giving 25% upfront bonuses for signing the paperwork. Let's stop there. Let me explain that. There are a hundred pennies in the dollar. There are no philanthropists at annuity companies. That's not free money. It is just priced in. Take this the right way or take this the wrong way. I really don't care. Index Annuity upfront bonuses are candy for the stupid. You deserve it if you're that stupid to believe and buy an annuity for the upfront bonus. You deserve what you're getting ready to get, which is none of the promises that were promised.

‌It's like going to a car dealership and walking in, and the guy says, "I want to show you this car." I'm like, "Yeah, great. Show it to me." "Look at the stereo. Look at this. It's got 17 speakers," and he turns up the audio. 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 and then combine it with market upside with no downside, which is not true, and they'll just keep going and then show you back-tested numbers. That's another negative.

‌The Negatives

‌Another negative that drives me crazy is agents and advisers 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. It should be illegal in all states because things were different when those annuities were priced. And even better, some of the indexes being sold now weren't even around 10 years ago even though they're saying, "Well, if you'd owned it 10 years ago..." wait a minute, the 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 are many 30,000-foot view sales pitches without getting into the weeds with Index Annuities. Notice that I'm really not talking about the product, which is the pros of Index Annuities. They're good. The negatives of Index Annuities pretty much 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. You should be able to explain it.

‌Client Example

‌I got a call the other day. The gentleman put half a million dollars into an Index Annuity, and I won't go into the company. It doesn't matter. They're all designed to pretty much produce the same rate of return. I said, "Can you explain the Index Annuity to me? Can you explain how the call-in all 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 us about index annuities and we don't feel like you fully understand it, we won't 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 darn good if you fully understand them and how they work. But that's kind of where the rubber meets the road. So, the positives of Index Annuities are good principal protection and locked-in gains. You can attach Income Riders for pension needs, and some of those Income Riders come with a built-in guaranteed confinement care enhanced benefits. Hey, that's fantastic, right? Principal protection in a crazy world. However, the negatives revolve around the sales pitches and the problem with that; Index Annuity agents know they can sell you on fear, and they can sell you on greed. They can either scare you into it or they can greed you into it. Just don't be that person. You're smarter than that. Don't fall for that.

‌My Plea

‌Here's my plea to the annuity industry because most agents just don't understand what they're selling, and they haven't done the research to know what they're selling. On the podcast, John Olsen and I talked about the fact that most agents don't understand what they're selling. They're selling the 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, thought leader out here, nod your head annuity industry. 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, easy-to-understand Index Annuities so that when the person gets the policy in the mail, they can read 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. I mean, you're talking about a no-brainer from an industry standpoint, a no-brainer from a sales standpoint, and a no-brainer from a marketing standpoint, which 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. It's very complex to make things simple." I can tell you that for what we do at The Annuity Man, we're always trying to make everything simple.

‌What I write is simple; what I say on video is simple; the podcasts are simple; the calculators are simple. We're trying to make it simple so people can make a good decision. But Index Annuity carriers out there, I know you're reading, Index Annuity industry out there, I know you're reading, lets as an industry make these products simple, okay? Because if you don't, it will come back to bite the industry. I don't know. 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. It's better than a CD-type return story. It's a lifetime income guarantee with a pension story. It's a good story, and it's a story that fits in a lot of people's world, with 10,000 baby boomers hitting age 65 every single 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.

‌Hey, I'm glad you read this. Touch base with us if you want to talk about Index Annuities. Schedule a call and I'll see you on the following Stan The Annuity Man blog.

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