What Are the Pros and Cons of Fixed Index Annuities?

What are the pros and cons of Fixed Index Annuities?

That is the holy grail question.

And to answer it correctly, you have to start with the truth.

Fixed Index Annuities were put on the planet in 1995 to compete with CD returns. To compete with CD returns. To compete with CD returns. They are not market products.

If you start there, then the pros and cons become a whole lot clearer.

Key Takeaways

• Fixed Index Annuities are **fixed products with **principal protection
• They were designed to compete with CD returns, not market returns
• One major benefit is the ability to attach an Income Rider for lifetime income
• One major downside is how they are sold and promoted
• Upfront bonuses are not free money
• Caps, spreads, and participation rates are simply levers that limit upside
• Carriers can change many index option terms over time

Why They Are Called Fixed

Let’s start with history.

Back in the day, these were called equity indexed annuities.

The industry had to change the name because the word “equity” was misleading. It made people think they were buying something tied directly to the market.

They are not.

They are fixed annuities issued at the state level and sold with a life insurance license. That’s one reason they are considered fixed.

The Pros of Fixed Index Annuities

There are some real positives.

Principal Protection

First, it’s a fixed annuity, which means your principal does not go down.

That’s a real benefit.

CD-Type Returns

Second, if the planets align, you can get CD-type returns.

Not market returns.

CD-type returns.

That matters because that is what the product was designed to do.

Income Rider Option

Third, you can attach an Income Rider for lifetime income.

That is the main reason these products matter in Stan’s world. If the goal is lifetime income starting in the future, the Indexed Annuity can serve as the delivery system for that rider.

That is where these products can fit.

Why We Use Them for Income Riders

When someone answers the two questions this way:

What do you want the money to contractually do?
Lifetime income.

When do you want those contractual guarantees to start?
A few years down the road.

That usually points to an Income Rider.

When that happens, the Indexed Annuity is simply the chassis the rider sits on. The focus is not on the accumulation side. The focus is the contractual income guarantee.

That’s where our annuity calculators can help if you want to compare real lifetime income guarantees side by side and see what the contract is actually promising:
‍https://www.stantheannuityman.com/ annuity-calculator/

The Cons of Fixed Index Annuities

Now let’s get to the cons.

And the biggest con is not the product itself.

The biggest con is how the product is sold.

You hear things like:

• upfront bonus
• market upside with no downside
• free long-term care

That’s where the nonsense starts.

Upfront Bonuses

An upfront bonus is not free money.

It is just part of the overall contractual structure.

That’s it.

Market Upside Claims

If someone tells you this product gives you market upside with no downside, that is where you need to get real careful.

“Free Long-Term Care”

Long-term care is a health insurance product, not a life insurance product. So when someone throws that in as a sales line, that should raise a red flag.

The Index Options Are a Mess

There are hundreds and hundreds of index option choices.

Caps, spreads, participation rates, and all the little levers.

All of those levers are designed to do one thing:

limit the upside.

That’s the truth.

And most people spending time trying to optimize those options are wasting their time.

Terms Can Change

Another downside is that many of those crediting terms can be changed by the carrier.

That means the cap, spread, or participation structure you see today may not be the one you live with later.

That is a real issue with many Fixed Index Annuities.

What They Are Good For

So let’s simplify it.

Fixed Index Annuities are good for:

• principal protection
• CD-type returns
• delivering an Income Rider for future lifetime income

That’s where they fit.

What They Are Not Good For

They are not good for:

• market growth
• chasing returns
• buying because of a bonus
• trying to outsmart the contract

If that’s why someone is selling it to you, that’s the problem.

The Bottom Line

The pros of Fixed Index Annuities are straightforward:

• principal protection
• CD-type returns
• the ability to attach an Income Rider for future lifetime income

The cons are also straightforward:

• aggressive sales pitches
• misleading bonus talk
• confusing index options
• carrier-controlled moving parts

Nothing is wrong with the product when it is used correctly.

The real danger is when it is sold for something it was never designed to do.

If you want to evaluate whether an Indexed Annuity actually fits your situation and compare contractual guarantees, not sales pitches, you can use our annuity calculators here: https://www.stantheannuityman.com/ annuity-calculator/