How Indexed Annuities Really Work

This question comes up all the time.

“Stan, do you hate Indexed Annuities?”

No. I don’t hate Indexed Annuities.

What I hate is how they’re sold.

Why Indexed Annuities Exist in the First Place

Indexed Annuities were put on the planet in 1995 to compete with CD returns, not market returns.

Let me say that again, because this is where people get confused.

They are not market products.
They are not securities.
They are fixed annuities, issued by life insurance companies and approved at the state level.

You need a life insurance license to sell them.

That alone should tell you something.

Where the Sales Pitch Goes Off the Rails

The pitches you hear sound great.

“Market upside with no downside.”
“Principal protection with market participation.”

Only one part of that is always true.

Principal protection.

You’re not going to lose money. It’s a fixed annuity.

Where agents push the envelope is on the “market participation” part. They’ll show you hypothetical numbers. Back-tested numbers. Charts that say, “If you had owned this 10 years ago…”

I wish back-tested numbers were illegal. They’re misleading.

Why Index Annuity Returns Can Change

A lot of people don’t realize this.

With many Indexed Annuities, the carrier can change the rules on how gains are credited. Caps. Spreads. Participation rates. All of those levers.

Those rules can change.

That’s why I don’t like selling Indexed Annuities based on what they might do.

At The Annuity Man, we sell contractual guarantees. You own an annuity for what it will do, not what it might do.

How We Actually Use Indexed Annuities

We do use Indexed Annuities.

Right now, they’re the most efficient delivery system for Income Riders if someone wants guaranteed income later.

That’s it.

We ignore the indexing side. We assume CD-type returns. And we focus on the contractual income guarantee from the Income Rider.

That’s the honest way to use them.

Bonuses and Other Red Flags

Another thing I don’t like in the Indexed Annuity space is upfront bonuses.

There are no philanthropists at annuity companies. They’re capitalists.

The bonus is not free money. It’s part of the overall contract. It doesn’t make it good or bad, but you shouldn’t focus on it.

If someone leads with a bonus, that’s a red flag.

One-Size-Fits-All Sales Pitches

Indexed Annuities are not one-size-fits-all products.

Some agents sell them that way anyway. They’ll say the Income Rider includes long-term care. That’s impossible. Long-term care is a health insurance product.

There may be confinement care, but that’s a different discussion.

The problem isn’t the product. The problem is the hype.

The Reality Check

If Indexed Annuities really delivered market upside with no downside, don’t you think Goldman Sachs, JP Morgan, Morgan Stanley, and UBS would be buying nothing else?

Of course they would.

If it sounds too good to be true, it is. Every single time.