Indexed Annuity Scams: Back Tested Annuity Returns
Today’s topic is about indexed annuity scams and these back-tested return numbers that seem so good. It’s just pie in the sky. It’s an apple cobbler in the sky; it’s a peach cobbler in the sky.
It should be peach cobbler because that’s my favorite dessert of all time, being from the South. But this is one of the deals and situations that drive me crazy. Back-tested hypothetical, theoretical, projected, hopeful agent, unicorns are chasing the butterfly scenarios.
All right. Stan, the Annuity Man®, let's talk about index annuities. First of all, disclaimer, I like them. I like fixed indexed annuities; why? Because they’re principal-protected, they don’t have any fees if you don’t put an income writer on them. I don’t sell index annuities. We use them primarily as a cost-effective and efficient delivery system for future pension guarantees and lifetime income guarantees for income riders. From an accumulation value standpoint, index annuities were put on the planet in 1995 to compete with CD or MIGA type returns, a 2-4 percent return.
But that’s how they’re held at the bad chicken dinner seminar, they’re trying to pitch you an index, and then they’re trying to say the market upside with no downside, market participation with principal protection. That sounds good, doesn’t it? Do you know what else sounds good? Taking a pill and having six-pack abs. That sounds good, too, and that's not going to happen either.
No one's come up with that. No one's come up with market upside with no downside. The Fed, Goldman Sachs, JP Morgan, UBS, Morgan Stanley, that's all they buy. If you can protect the press, you won’t get market returns. That's all you do. But it doesn't work like that ever. It just doesn't. You have to understand that if it sounds too good to be true, it is every single time with annuities and especially index annuities.
Now, what's happening currently in the marketplace right now? I don't like index annuities. They're showing back-tested numbers. Unfortunately, with many index annuity proposals that the companies put out, they have the back-tested numbers in there. In some states, it's illegal. I wish it would be illegal in all states. They were looking at ten years ago when interest rates were at a different level and when the crediting rates were at a different level. When I say crediting rates, I'm talking about those participation rates, cap, spreads, the limitation on the upside with an index annuity. All of that was different. They say, "Well if you had it ten years ago, you'd have made this." Never, ever make a hypothetical, theoretical, projected purchase. Ever. Make it on the contractual guarantees of the policy.ʼ
What's the contractual guarantee of the index annuity? Excellent question. I'm glad you asked that. It's the principal protection of the policy. That's it. That's the guarantee. You're not going to lose money with a fixed index annuity. It's fixed. It's a fixed product. It's not security. It's issued at the state level by a life insurance company. It's a fixed annuity.
Currently, there are over 700 index option choices to choose from with index annuities. That's a lot. Spoiler alert, most of those index option choices are designed to create the same level of returns. Companies are creating indexes out of mid-air. The index has been around for, back-tested say, three months or six months, and then the agent will say the following, "If you would've owned this index ten years ago, this would have been your return over those ten years." It's only been around for three months or six months. How do you do that? You can't do that.
Some states, thank goodness, say you cannot show these back-tested numbers because you're buying the dream, and you're going to own the contractual reality. Here's the other thing you have to understand: people are not told when they're buying index annuities. Let's just say, for instance, you buy a seven-year surrender charge index annuity or a ten-year surrender charge index annuity. There's a one-year call option on, let's say it's normal, it's on the S&P 500, or let's just say, it's one of these made-up ones, the unicorn index. You own that one-year option on the unicorn index. What do you own? You own a 10-year surrender charge or a seven-year surrender charge with a one-year guarantee depending on the product. Let me repeat that. You have a 10-year surrender-charged product with a one-year guarantee. Oh, by the way, spoiler alert; the annuity companies can change the crediting method, which means that the one-year option caps spread participation rates.
They can change how that gain can be calculated at their discretion. Meaning they're not going to talk to you; they’re not going to talk to me. They're just going to change it. When people show back-tested numbers, and they're showing what would happen if you'd owned it ten years ago, you really should say, "Really, How about the one-year?" Because they're going to change at year two, year three, year four, year five, year six, year seven, year eight, year nine, year 10.
Don’t Fall For It
Don't fall for that. Don't fall for the pie in the sky stuff. By the way, index annuity salespeople typically just sell index annuities. Ask them this, do you sell immediate annuities, deferred income annuities, qualified longevity annuity contracts? Do you sell multi-year guaranteed annuities? What do you sell, or do you just sell index annuities? What percentage of your business is just selling index annuities? If that person says over 50 percent or some crazy high number, then they're just slinging index annuities.
They're not asking you the question, which is, What do you want the money to do contractually? When do you want those contractual guarantees to happen? They're not using my pill acronym, principal protection, income for life, legacy, long-term care? They're not asking you if you need an annuity and what you want it to solve contractually. They're trying to show you the back-tested numbers to make you feel that you’re going to get something that your neighbor doesn't have.
Please don't fall for it. There's a lot of Fixed Index Annuity scams out there. Are they too good to be true? Yes. Are they pretty darn good? Yes, they are. They're good products. Just make sure you understand the returns that they will provide. Remember, you own an annuity for what it will do depending on the product, not what it might do.
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.