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The Truth About Fixed Index Annuities

Stan Haithcock
May 11, 2023
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Hey, can you handle the truth? Can you handle it? As Jack Nicholson said, can you handle the truth about Fixed Index Annuities? I'll tell you what, there needs to be some truth out there. Many pitches are flying through the air, radio, TV, the bad chicken dinner seminars, about Fixed Index Annuities. From here on, let's call them Index Annuities to make it simple. Good products but sold a little bit too hypey for me. They're CD products. At the end of the day, you need to know what you're being pitched before you sign any piece of paper.

The Cold Hard Truth

What is the truth about Index Annuities? They were designed in 1995 to compete with CD returns. That's exactly what they do, but they also can offer an attached benefit for income called an Income Rider and a very efficient way to deliver that, but many people want to know how the engine works. How do the gains work? If someone's talking market upside with no downside, how do they spew that out, and how can they back that up? Well, number one, Index Annuities are Fixed Annuities. It's a life insurance product, and it's not a security. To sell it, you need a life insurance license. In essence, the Indexed Option part of the Index Annuity is from typically, and there are many different types out there. We could spend hours on it, but let's take a 30,000-foot view. There's a call option from the contract anniversary date to the contract anniversary date. Call option, meaning we're betting to see if it goes higher on indices. Typically, the S&P 500 and gains are limited. They call them caps and spreads. The carrier limits them and can be changed at the carrier's discretion. That sounds good, in theory. And when the plans align themselves, sometimes you can get a good return, but the blended return over time is better than the CD return, regardless of what you hear, shown, or back tested.

The Will Do, Not Might Do

By the way, you own an annuity for what they will do, not what they might do, and the will do is the contractual guarantees. The might do are all these unicorns chasing the butterfly return scenarios you see, and they typically don't come true. So please don't buy an Indexed Annuity for pie-in-the-sky return numbers because the pitches sound really, really good. Market upside with no downside, but you're smarter than that.

The Visual Breakdown

Fixed Annuities were designed in 1995 for CD-type returns. At the end of the day, what does an Index Annuity do? It protects your principal, and it's a principal protection product, but let's also look at it from the standpoint of delivering the benefit of an Income Rider for future income. Get the trustee pen out. We'll show you how it visually works when you attach an Income Rider to an Index Annuity. Write the word FIA at the top. Now draw a line down the middle. The left side is the option side. So, remember, the call option is typically on the S&P. Right now, there are a lot of made-up indices out of mid-air that they're back testing for, but at the end of the day, it's a call option on indices that they're going to lock in typically on an annual basis. Now on the right side, that will be the Income Rider. But let's talk about what the Income Rider does. So, the Income Rider is on this side right here, and what an Income Rider is a future benefit for future income. Now, two separate calculations. If you put $100,000 on both sides, when you get your statement, you're going to see two separate calculations. Now, we don't know what the option is going to be. There's a minimum guarantee. If there are no returns, you won't lose any money here, but you'll get a 4% return, a little bit better than the CD rates here. Now, here's the pitch that's out there right now. The pitch is, "Okay, on the Income Rider's side, you're going to get an 8% return or seven or six or some high number that makes you think Jimmy Carter's still in office," and you're going, "Wait a minute. If the 10-year treasury is really low, how is some genius at an annuity company giving me that?" They're not. It's Monopoly money. The right side is Monopoly money that you can only use to calculate your first income payment. Hey, that's not a bad thing. You just need to know that. In other words, you can't peel off the interest. You can't cash it in for a lump sum, and you can't transfer it. If you transfer to annuities, the left side calculation would transfer, not the right side. Does everybody understand what I'm saying? The right side is Monopoly money, a phantom account that can only be used to calculate your first income payment. Once the income starts, this wonderful Jimmy Carter yield goes away. The other thing is this. Now typically, most Income Riders, and when I say most, tons of Index Annuities, are out there. There are tons of different Income Riders, but the majority, when you attach this Income Rider, there's a fee. The fee from this comes out of the left side. The fee from the Income Rider comes out of the accumulation value, for lack of a better word. I call it real money value. The left is the real money side. So, the fee comes out of that. What's it growing by every year that fee? 8%. Annuity companies have the big buildings for a reason, right? That doesn't mean it's bad; you just need to know that. But for future income guarantees that are flexible, an Index Annuity is a good delivery system for that. And by the way, the right side will be higher 99% of the time than the left side. And why is that important? Because for you to access that Income Rider benefit side that's been growing by that high percentage number all these years, you have to turn on the income stream. That's a great business model for the annuity company because it ensures that they will keep the money and then pay you a lifetime income stream based on your life expectancy when you take the payment. So, the truth about Indexed Annuities, truth is CD-type return, truth is Monopoly money growth for income, which is okay if future income is the goal, but understand if it sounds too good to be true, it is.

Sales Pitches

Let's go through a couple of sales pitches that you're going to hear out there, and let's decipher the truth out of every single one of them. You're going to hear, "I'm going to give you an upfront bonus, 10% upfront bonus for signing the contract." Hey, that sounds good. Free money. Trust me when I say there are no philanthropists at annuity companies that wake up in the morning that want to give you free money. It's just part of the overall contractual guarantee. Another thing you'll see here is market upside with no downside or market participation with no downside. Sounds good in theory, but you have to understand that they were put on the planet, they, Index Annuities, to compete with CD returns, and that's typically what you're going to see over time.

Client Example

I get these calls all the time. Guy called me the other day, "Hey, Stan, I just bought an 8% annuity and get 8%." No, you're not. Jimmy Carter's not in office. He's building homes in Atlanta. There's no 8% out there. You have an Income Rider growing at 8% that you can use to calculate your first income stream. That doesn't mean it's bad, but it's not yield. Now, he disagreed with me, of course, and said, "No, that's not true. That's not what I was told." Okay. Then call the annuity company and say, "Send me all that money that's been growing at 8%." So, he did, called me back, and goes, "You're right. They wouldn't send me the money. It's only for income." Of course. Here's your common sense out there everybody. These are good products if you understand them fully.

FIA Protection

So how do you protect yourself in the hinterlands of Indexed Annuity sales, the go-go sales out there? First, I want to thank all the agents feeding my mom in St. Augustine, Florida, at these bad chicken dinner seminars for years. Of course, she's never bought one, but she keeps going. She's the type of person that calls them up and says, "Hey, what's on the menu for dessert?" I mean, she's a picky seminar. She's a professional plate licker, as they say. But here's how you protect yourself in the Index Annuity world. When you get pitched something, write down exactly what you hear that agent say or advisors say, the way you understand it, not how you think the product works. Write it down in detail, sign and date it, flip the page around, and have that other agent and advisor sign and date it too. Now, if they've told the truth, great, you've got it on paper. If they haven't, they push the envelope a little bit or maybe need to do a little more research on the product, then they're probably not going to sign it, and you've got your answer on the product.

Be very careful out there because the benefits and limitations of Index Annuities are obvious. The benefits, it's a fixed annuity. You're not going to lose any money, but you can get a little bit more than CD-type returns over time, and you can attach an Income Rider for future income needs, which is all a good thing. The limitations all circle around the sales pitches out there, the too-good-to-be-true sales pitches. Number one, you're smarter than that. As they say in Las Vegas, if you don't know who the sucker at the table is, it's you. You don't want to be that person, right? It's been a firehose of information out there. I guarantee you're going, "Whoa," and I haven't even covered it. Believe me; we haven't even gotten into it.

All annuities are different, and all annuity types are different. You can't just say, "I hate annuities because that's like saying I hate all restaurants." When people you hear on TV in the ads say, "I hate all annuities." Come on now. You're smarter than that. Annuities have their place, they're contracts, and they're transfer of risk strategies. I've thrown a lot at you on the Index Annuity side, but do me a favor. Go to my YouTube Channel and hit the subscribe button. I put out a new video on annuities, all different types. If you want a video done, go to our site and sign up there and say, "Hey, Stan, do this video on this topic." I'll do it. I'm doing a ton of these because I want to educate the public on these products. After all, there's a lot of misinformation out there. Also, if you need a quote on Index Annuities and want to discuss it, book a call with me. I'm here to help you understand the good, the bad, and the limitations because Index Annuities do have their place if you fully understand them for what they will 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.

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