Fixed Index Annuity: Do FIAs Get Stock Market Returns?
Stan The Annuity Man, America's annuity agent, here to talk about those beloved Fixed Index Annuities that everyone loves to go to the bad chicken dinner seminars. And if it sounds too good to be true, it is.
The question of the day is, do they get market returns? I mean, you're getting pitched that they do, right? So, Stan The Annuity Man, America's annuity agent, licensed in all 50 states, including yours, what's the short answer before I start talking about it in detail? The short answer is sometimes, but not all the time. And with that, let's get right into it.
Index Annuities. Hey, here's the bottom line with it. I'm going to give you a little short history on Index Annuities. Sit back, grab your coffee and tea as Stan The Annuity Man tells a true story about Index Annuities. In 1995, Index Annuities were put on the planet, 1995, that's a long time ago, to compete with CD returns. Not market returns, CD returns. Hey, that's a good thing, right? Nod your head. Yeah, it's a good thing. CD returns. They protect your principal. They're Fixed Annuities issued by life insurance companies and regulated at the state level. They are not securities, which means they're not market products.
The Two Questions
Now, I said earlier that they do get market returns sometimes. Sometimes they do. But blended returns over time, you have to expect CD returns because that's historically what they've done. And that's okay.
So, if you said to me, and I always ask these two questions to people when they say, "Okay, I'm thinking about annuities, Stan. What type of annuity do I need?" Here are the two questions. What do you want the money to contractually do? That's the first question. Go ahead and answer it. And when do you want those contractual guarantees to happen? Got it? Now, you can't answer the first one, "I want market returns," and you can't answer the second one, "I want to protect the principal, and I want that to happen." No, you can't. Okay?
The Two Annuity Types
If you're looking for principal protection, don't want to lose a penny, don't want the markets to affect it, or don't want anything to happen to your money because you've worked hard and you've laid it on the line, there are two annuity products that do that. Two. Multi-Year Guarantee Annuities, which are Fixed Rate Annuities and the annuity industry version of the CD. That's the first type, and I've done videos on that as well. And then the second type is Fixed Index, not Indexed, Index Annuities. Those are the two types that protect your principal 100%.
Now the difference is, with a Multi-year Guarantee Annuity, it's like a CD. You get a specific interest rate. You know that interest rate, that interest rate's going to happen. You lock it in for a specific period of time. Duh. CD. Nod your head. Exactly.
Index Annuities, I'm not going to get in the weeds here because this is going to get ugly. It'd be like showing paintings to blind people. No offense to blind people. But Index Annuities are based on a call option, typically on an index; I'm going slow here. And typically, that index is the S&P 500, not including dividends.
In essence, in English, contract anniversary date to contract anniversary date. Let's say December 1st to December 1st, that call option will expire. Now at the end of that expiration, you'll get some of that upside, if there is any upside. Now the annuity companies limit that. They call them caps and spreads and all that stuff. It's pretty complicated. But the bottom line is you'll get a portion of that. But if the planets align themselves, and the unicorns chase the butterflies, and the Republicans get along with the Democrats, there are years that those returns might be pushing a market-type return. But most of the time, unicorns don't chase the butterflies, the planets don't align themselves, and the Democrats don't get along with the Republicans. Nod your head.
What does that mean? You're going to get CD returns. Or worst-case scenario with an Index Annuity, is you're not going to lose any money.
Now, there's a bunch of guys out there, guys and gals, agents, that use this thing called Zero is your Hero. That's garbage. That's crap. All that means is you're not going to lose any money.
Let's say you're not going to lose any money. There is no Zero is your Hero. That's malarkey. I hate that. No offense to people that use that. Just stop using that. It doesn't sound good. The bottom line, the worst-case scenario is zero with an Index Annuity. The best-case scenario is you're going to lock in a portion of that index call option, not including dividends. And by the way, I say that because with the S&P 500, over 50% of the return are dividends.
Worst case scenario, you don't lose any money. Best case scenario, you get to lock in an amount, CD type, enhanced CD type returns. But here's the best part about Index Annuities. If you think about them rationally and try to own them rationally, that gain will lock in permanently. It just stair steps and locks in. It doesn't stair-step and lock in at 9 and 10, 11, 7 and 8%. It stair steps and locks in at 3, 4, 5, 0, 2, and 3. Rational, right?
How to Use Index Annuities?
So, how does Stan The Annuity Man and his army of clients across the country in all 50 states, how do we use Index Annuities? Two ways. If you want it for pure principal protection, we can do that. But the primary way that the number one agent in the country uses Index Annuities is I attach Income Riders. Income Riders are attached benefits at the time we do the application that guarantees a future lifetime income stream.
See, to me, annuities are all about principal protection, income for life, legacy, and long-term care. The acronym is PILL. Most people are looking for annuities for income for life. I use Index Annuities with these attached Income Riders for future income guarantees.
Now, those future income guarantees are in place, but when you attach them to an Index Annuity, a Fixed Index Annuity, you're in control of that asset. You don't have to use that income stream. You don't have to turn it on. You can control that principal. You can change your mind. But it's there. It's like having a pension that you can turn on but don't have to. It's Flexible. Also, it's a very efficient, affordable, and a low-cost way to deliver that income guarantee. Keyword rider, it's riding on top of that Index Annuity policy. I think that's the best way to look at Index Annuities.
But returning to the original question of, "Hey, do they get market returns?" I know everybody out there was like, "Please, Stan, tell me they're going to get market returns. Please tell me. Please, please, please tell me that I'm going to get market returns with principal protection. Please, Stan. Please." No. You're not. You might one year out of a bunch, but not consistently.
Be rational. Be pragmatic. If it sounds too good to be true, it is every single time with annuities. Why? Because annuities are contracts. And as I told my wonderful staff, I said, "This is a sentence you need to remember." And it's a saying you need to answer every question with, "You can't polish a turd, but you can roll it in glitter."
I know you're saying, "What was that?" That's The Annuity Man telling you that Index Annuities are good. They're contracts. And if they're used properly, they work. But you can't polish them up. Remember that. I know you're saying, "He did not just say that." Yes, I did. I did just say that.
Now that you've brought yourself back up from the floor, I will say it again. You can't polish a turd, but you can roll it in glitter. Index Annuities. I did a video, The Truth About Index Annuities and boy, it was a good one. I think I won an award. I'm not sure. It was up for an award. It should have won an award.
I make these videos all the time. I do them every day, Monday through Friday. I have no life. I've been married for 34 years. I have two daughters in their 20s. What do you expect me to do? This is what I do. I'm the number one agent in the country for a reason because I tell the truth. And we look at annuities for the contractual guarantees only.
Now, a little self-promotion. Hang in there with me. I write every day. I make these videos every day. I do a weekly podcast, Fun With Annuities, on all major platforms. And you can go to our website for the best annuity calculators on the planet to find the best contractual guarantees for your situation. Why? Because I represent pretty much all carriers. All carriers want Stan The Annuity Man as part of their gig. Do you blame them? No, you don't.
Another thing, go to my site and get my books. You can download them for free because I'm just like that. I have seven books and you can download them, no strings attached. And with that, I'll see you on the following Stan The Annuity Man Blog.
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