Hidden Truths & Facts About Fixed Index Annuities: Shootin’ It Straight With Stan

Welcome to Shooting It Straight With Stan. I'm your host Stan The Annuity Man, America's annuity agent, licensed in all 50 states. Today's topic is hidden truths and facts about Fixed Indexed Annuities. Now, we get a lot of calls about this because people are getting the sales pitch that sounds too good to be true. After all, it is. We have nothing against Indexed Annuities.

Brief History

Here's a little history on Indexed Annuities. Indexed Annuities were put on the planet in 1995 to compete with CD returns. In other words, the hope and the goal of the structure and the strategy was to get a couple more percentage points than a CD, and they've done well in that range. They're not market products. One of the biggest fallacies is how they're sold, as some of the catchphrases are market upside with no downside, market upside with principal protection, and all the little nuanced things that sound too good to be true because they are. They're not market products. These are Fixed Annuities and life insurance companies issue them. They're regulated at the state level. They are not securities.

Commissions

They're not regulated by FINRA or the SEC, so it's the wild wild west, unfortunately, with a lot of the sales pitches, not all, but if you go to the expensive steak seminar dinner seminars, most of the time it's a one size fits all one carrier approach trying to sell one product to everybody, which is insane. It's like a doctor holding a seminar and trying to sell one medication to everybody in the room. Everyone's different. People either need or don't need annuities, but Indexed Annuities, I think of the current go-go product and popular product in the industry because it has the highest commission. And all commissions with annuities, plural, all types are built-in and hidden from the client, which I'm not sure I like, but it's the rule. But it is the highest. It is the highest commission. It's the one that if you sell enough of it, you go on the trip to Italy or Bora Bora or France or whatever with your girlfriend, boyfriend, wife, husband, whatever applies. Those incentives went away in the securities industry in 2003, and I wish they'd gone away in the annuity industry as well, but they have not. The annuity industry and life insurance lobby are pretty strong on the Hill, so I doubt if that will happen.

Index Choices

A couple more facts and hidden things about Indexed Annuities you need to know is the indexed option strategies on the accumulation value, and that's the one, if you're probably breathing with a bank account, someone's tried to pitch you one. It's the one that has the caps, the spreads, and the participation rates- all these foreign things you've never heard of. Those are the levers that the life insurance company issuing the Indexed Annuity uses to limit the upside, you know, their for-profit. Remember, they're trying to do CD returns a little bit better, but I think there might be even more. I'm pretty confident there are more than 750 choices. Think about that. 750 index choices, in my opinion, you could throw a dart at all of them, and you'd be okay because they're all kind of designed to get the same return anyway in most cases.

Hypotheticals

The other thing that you want to know, there are over 50 or more index choices, and you're like, wait a minute, Stan, there's S&P, there's Russell, and you can count them on your hand. One of the issues with the Indexed Annuity space is what's happening too often; the carriers will do what I call an algorithmic back test. In other words, they'll create an algorithm to look for a return with a basket of investments. Once they find that return that looks great, but it's hypothetical, not guaranteed. They will name that index and attach it to an Indexed Annuity, and then the salesperson, unfortunately, might say, well, if you'd owned it 10 years ago, this would be your return. Unfortunately, it's been around about three months, so many states are starting to disallow that kind of back testing. But combined with this, you have 50 plus indices to choose from. You have 750 index option choices. And then, on top of that, at the time of this blog, most index options are a year in length, but some are two years in length, three years in length, four years in length, and five years, so that gets even more complicated.

Income Riders

For the majority of them at the time of this blog, you lock in on the anniversary date, so you're kind of a slave to the date, but some will allow you and some of the longer term will allow you to lock in whenever you want to lock in, which just adds to the confusion in my opinion. As a side note, at The Annuity Man, we typically, 99% of the time, use Indexed Annuities as a very cost-effective and efficient delivery system for Income Riders, which is a contractually guaranteed income that you can attach at the time of application to the policy. If you visit my site at The Annuity Man, you'll see Income Rider quotes. You won't see Indexed Annuity quotes because there's nothing to quote.

Not a Growth Product

There's nothing, and I say that to get back to the caps and the spreads of the participation rates. And if you want to go down that rabbit hole, I've made videos about that. I've written an Indexed Annuity owner's manual, which you can get for free. I've done it if you want to go down the rabbit hole. However, the way that the indexed option is structured is that it's a year in length in most cases. So, let's start with that one. And I always tell people, let's say you bought a ten-year Fixed Index Annuity standalone for growth. Unfortunately, you bought it for growth. It's not a growth product, and you know what the cap and the spread of the participation are from the start. The problem with that is that you really have a one-year guarantee; you'll own a one-year guarantee with a ten-year surrender charge because the annuity industry can change the terms of the cap, the spread, and the participation rate at the anniversary date.

Now, there are all kinds of sales pitches and renewal rate histories and all that stuff, but the bottom line is the annuity industry has you from the standpoint of what it will be. I've seen some rugs pulled out from people where there was a 7% cap, and then in year two, there are two. We've seen that, and I'm not against the annuity companies, they're a for-profit business. They have got to do what they've got to do. But it leads me back to never buying Indexed Annuities for growth. You should buy them for principal protection first. Then CD type returns second. And then third, what we use it for, which is the attachment of an Income Rider, if you need income in the future, and we like Indexed Annuities using it that way because at the end of the surrender charge time period, if you don't need the income and things have changed in your life or you just don't want to do it anymore, you can get all your money back on whatever that accumulation value has grown to. But it's very, very, you know, the index side can be very, very complicated.

Breaking it Down

I always joke that I know five people who fully understand Indexed Annuity options. I'm one of them. I know the other four, but I'm one of them. But if you can't explain it to a nine-year-old, don't buy it. No offense to nine-year-olds. So, the other thing about the Indexed Annuities is that they became popular in that 2008 debacle because people were shell-shocked. It was a perfect time to introduce the product. It's been overhyped by too many agents because it is a high-commission product, and it is a good story, you know if you're not telling the total truth. If you give them the 30,000-foot view, it's a really good story. You know, you get the upfront bonus. You get market upside with no downside. You get free long-term care, and you get a lifetime income. Let's break that down. The upfront bonus is candy for the stupid. Buying an Indexed Annuity for the upfront bonus is like buying a brand-new car for the stereo system. There are a hundred pennies in the dollar. That should be irrelevant to your decision.

You should quote all carriers to see who provides the highest contractual guarantee, whether they have a bonus or not. That's kind of the nebulous overpitched part. The market upside with no downside is completely wrong and borderline fraudulent because they were put on the planet in 1995 to compete with CD returns. The third thing they say is, well, you get free long-term care. No. You don't. It's confinement care. Long-term care is its own product and long-term care, pure long-term care is a health insurance product with very good tax benefits, but it has nowhere to be found inside an Indexed Annuity. Then, the only truth of that four-part sales pitch is the lifetime income with the Income Rider. But if that's what you're trying to do, shop all carriers, go to our site, and shop all Income Riders for the highest contractual guarantee.

The PILL

There is no one-size-fits-all. That's kind of the hidden truth about Indexed Annuities. It's not a one-size-fits-all product. You know, you need to solve for goals specifically. Annuities solve for four things: principal protection, income for life, legacy, and long-term care. If you don't need to solve for one or more of those, then you don't need an annuity, and you don't need to buy a product that tries to solve for them all. You take one of the goals and then shop for that carrier that provides the highest contractual guarantee for one of those items in the PILL. If it's lifetime income, go shop lifetime income products. If it's principal protection, go shop principal protection products.

Client Example

I had a guy call me the other day. He said, you know, you sent me the specimen policy, which we will do on the index annuity, and all of the explanations were these complicated math problems with letters in them. I said, yeah, that's calculus. It's very high-level stuff about which they can change the rules.

At the time of this blog, we have yet to be approached and shown an index annuity between myself, my management team, and the consultants I hire outside that we deem appropriate to recommend for accumulation value. We just use it as, and love this, as an efficient principal protected cost-effective way to provide Income Riders in future lifetime income streams starting at a future date. So, we love them for that, but they are very, very complicated. They're presented as too good to be true, but those are some of the facts that you probably didn't know.

In 1995, they were introduced, over 750 index option choices, over 50 indices, index choices. Oh. And the other thing you need to know about the index is that it doesn't include dividends. So, if you're a market student, you understand that over 50% of the returns of the S&P hundred index are dividend-based, and so there are no dividends with this index. Then, the other thing to really be careful about is the upfront bonus. You have to be smarter than that.

There are a hundred pennies in the dollar. Just think of the analogy I gave you walking through a car dealership, and they're telling you about the transmission, the V-6, and whatever. You're like, I don't care about that. I just want to hear the stereo system. That's how stupid it is to make a decision on an upfront bonus. It also reveals whether an agent or advisor keeps discussing the upfront bonus. It's a shiny thing. It's a distraction. I wish companies would do away with it, but I understand. It's a capitalistic market, and they're trying to attract all of you, 13 to 15,000 boomers who are hitting 65 every single day. I get it. But the other thing, and I'll close with this, is that there's nothing wrong with Index Annuities. You just got to know the facts.

Again, you can get my book. You can watch all the videos I've done on them. You can talk to us and schedule a call. But they are not too good to be true. If you could really get market upside with no downside consistently, the sales pitch is what Goldman Sachs, JP Morgan, and Morgan Stanley would buy. And spoiler alert, having worked there and in New York, they're not buying those. It's one of those things where I feel like the consumer's getting taken advantage of, and that's the reason that I do this educational content. I'm not better than anybody else. I'm just trying to warn you that these products aren't going to do what you want them to do. And if you buy the dream, you're going to own the contractual reality, which means that if you buy them, buy the contractual reality.

That's pretty much it when it comes to Fixed Index Annuities. My name is Stan The Annuity Man. That's Shooting It Straight With Stan. Hope this helped. We'll see you next time.

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.