006: What is a Fixed Index Annuity (FIA)?

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welcome to

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fun with annuities with your host me

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stan

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the annuity man america's annuity agent

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can annuities be fun

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can contractual guarantees be fun

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absolutely they can find out the brutal

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facts about annuities

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with no sales pitches or high pressure

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nonsense

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just the brutal and factual annuity

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truth which is all you need to hear

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let's have some fun with annuities and

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let's have that fun start

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right now

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hey this is stan the annuity man and

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welcome to fun

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with annuities today we're going to talk

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about one of the most controversial

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products and unfortunately most missile

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products out there right now is the

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fixed index

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annuity used to be called equity indexed

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annuity

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and there's been a lot of fight over

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this this product which is very very

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interesting to me because

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in essence it's a glorified cd product

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it's

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it was developed in 1995

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to compete with cd returns and that's

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exactly what it does

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it's not sold like that it's sold pie in

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the sky unicorns chasing the butterflies

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you can have your cake and eat it too

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it's if it sounds too good to be true

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all of that and we'll kind of go through

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it but

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what i'm holding in my hands one of my

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six owner's manuals that i've written

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one of the

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sixes on indexed annuities it's a fixed

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indexed annuity owner's manual

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and i encourage you to get this it's 90

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pages

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and i really tried hard to make it

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succinct

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to the point and brutally factual just

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like everything that i do

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and if you've bought an index annuity

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i'm not sure you want to read it because

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you'll go oh my goodness that's what it

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does

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no no ken you do need it but if you're

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being pitched in indexed annuity which

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you probably are if you've gone into a

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bank or a

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brokerage firm or going to the bad

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chicken dinner seminar

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that's what they are most likely showing

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you

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it is a high commission product to the

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agent even though agents are all

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commissions to agents are hidden and you

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never see them

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indexed annuities are high very very

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high

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and you know you can go on trips if you

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sell enough of them there's a there's a

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lot of bad things

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to them which is unfortunate because i

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think if explained properly

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and understood for what it really does

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and what it was designed to do

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it can be a good product for you or it

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can be a good delivery system for

2:32
an attached income rider benefit and in

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a previous podcast i

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i addressed income writers which i i've

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also written an owner's manual

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on as well and would send you again go

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to the annuityman.com

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and you can get all of my owner's

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manuals whatever one you want

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you can also get an indexed annuity

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quote which will just show you what it

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you know based upon your parameters you

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put in a quote for indexed annuities

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with and without an income writer

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but as i do with every product i start

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with

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the limitations because that's in the

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back your head anyway you're like

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okay what's the catch stan i hear all

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this good stuff

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because i hear people call it a hybrid

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and by the way

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i hate it when they do that hybrids are

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mattresses and cars and plants hybrids

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are not annuities

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in my opinion and anytime someone uses

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the word hybrid

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it's probably attached to some indexed

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annuity pitch

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a lot of the indexed annuity pitches you

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hear on tv they never even use the word

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annuity

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they say market upside with no downside

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or

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you know reasonable rate of return with

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anytime you hear that that's an index

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annuity and it's not a market product

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it's i mean

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the bottom line with indexed annuities

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to sell an indexed annuity

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you don't need a securities license you

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need a life insurance license which

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should tell you all you need to know

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about the return scenario

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now i know some of the back-tested

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unicorns chasing the butterflies

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proposals people show up there

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show great things and show great

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potential

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and maybe those planets align here and

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there but at the end of the day

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you have to look at indexed annuities as

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glorified cd products

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that hopefully one or two years can do

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better

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but it's gonna maybe get you a little

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bit more than a cd but it might not it

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might get you zero

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at the end of the day the contractual

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guarantee on an indexed annuity is

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either zero or whatever the minimum

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guarantee is which is a one percentage

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type thing

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and you have to go into that

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understanding this let's talk about

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limitations

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let's talk about market growth this is

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the one that that bothers me a little

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bit because people push the envelope on

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the market growth side

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it just wasn't designed for that now

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have they done some of those done that

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in the past

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yeah there's certain circumstances that

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some index and news have done

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well during some years but you can't

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call it a market product if we're going

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to do that as an industry then it needs

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to be regulated as a security

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in my opinion and people that talk about

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market

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need to be licensed to talk about

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securities and past series sevens and

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all those things

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which are licensed requirements so the

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market thing bothers me

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a lot of cases index news are sold with

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attached income riders

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and again i covered income writers in a

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previous podcast and written an owner's

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manual on it

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in most cases the income writer values

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is always going to be higher

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than the accumulation value and the

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writer fees are taken out of the

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accumulation value so

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if the writer fees one percent and the

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indexed annuity

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you know is a cd type product then

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you're going to be minus one

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plus the cd return so in essence you

5:32
just have to have your realistic hat on

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if it sounds too good to be true

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it is every single time without

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exception with annuities

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you know if it was as good as it's been

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pitched in a lot of times

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then the fed would have everything would

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be solved they just buy index annuities

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so it

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just be realistic don't be a dreamer

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don't be the rube at the table don't be

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the sucker

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please ask questions dig in read the

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books

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the other thing too about index

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annuities in most cases

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the indexed annuity carrier can change

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the way

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the accumulation value the caps and

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spreads and index options

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they can change the way that those are

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calculated at their discretion with most

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with most policies

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and you also have to understand like the

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majority of indexed annuity

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returns the index they're using is the s

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p 500

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but it's not included in dividends and

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historically the dividends have

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represented over 50 percent of the

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return of the s p 500

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so once again details you got to know

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them

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and with index annuities and the most of

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them there's lots of them out there

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most of them lock in the gain one day

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per year so the other 364 days

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you can't do anything there are some

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that allow you a little bit more

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flexibility than that but then they

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limit you on other

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parts of that in the annuity world this

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is a fixed annuity

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you have need to have a life insurance

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license in some states that takes you

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about a week or two to get licensed so

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that's a little scary that someone can

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get licensed in a week or two and then

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sell an indexed annuity

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then i mean it's good or bad but the bar

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for selling it's pretty low

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so you have to be careful you know with

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that and and you have to just

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go slow and do your do your homework and

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due diligence and typically it's a

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one-size-fits-all sales message

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so if you're going to a bad chicken

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dinner seminar they're not doing the two

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questions remember the two questions

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always ask to even see if you want an

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annuity

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what do you want the money to

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contractually do keyword contractual

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and when do you want those contractual

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guarantees to start

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if your answer is market growth don't

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buy an indexed annuity

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if your answer is cd type returns then

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maybe it works

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right you know answer those two

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questions the problem i have with the

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one size fits all sales message that you

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see on tv a lot with the ads that never

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mention the word annuity or

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you know it's just pie in the sky stuff

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or the bad chicken dinner seminar is

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that

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regardless of your circumstance

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regardless of what you're trying to

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achieve

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they're going to sell you that indexed

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annuity and you and i both know that's

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not right

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that's like going to a restaurant and

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they have one thing on the menu

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you might not need an annuity after

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doing the due diligence you might if you

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want market growth then this shouldn't

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be the product

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there is no market upside with no

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downside if there was then

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problem solved there's cd returns with

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no downside

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there's enhanced cd returns with no

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downside but

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cavalierly throwing market the word

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market around

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i think is a mistake the industry is

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allowing to happen

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and i don't blame the carriers it's it's

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just hard when when indexed news are

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regulated at the state level and

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someone's running national radio and tv

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ads

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what state's going after them right it's

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kind of tough so

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hopefully it gets cleaned up you know

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they've been trying to clean it up for a

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while they haven't yet

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let's hope it happens so you know the

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other limitations

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is um you know there's kind of a

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middleman style distribution system kind

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of like a

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if you think of the old travel agencies

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there's a two-step distribution with

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indexed annuities

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that there's like a field marketing

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organization that typically

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is in between the agent and the carrier

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i'm not saying that's bad i'm just

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saying it is what it is so there's cuts

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along the way

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so that everyone gets paid so you know

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the the commissions are high

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etc but you know those those are

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those are some of the limitations i

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don't want to beat it up too much

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because in

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if you fully understand it you fully

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read the book and explain and had a

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conversation with me

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and you know the downside and you're

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okay with zero or it not doing anything

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but you're protecting money you might

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get a little bit more than enhanced ce

9:28
returns then fine

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but don't go into it dreaming because

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you're owning a contract don't buy the

9:34
dream come by the contractual

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reality the positives the the the

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benefits are its principal protected

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there is a guaranteed

9:41
minimum on it if you had gains

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they're locked in permanently i think

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that's good so let's just say

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every year at the contract anniversary

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date you lock in your gains that's fine

9:51
they're locked in permanent it's just

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that i think those

9:53
points are unfortunately enhanced by

9:56
misleading

9:57
return hopes as we can say

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the gains grow tax deferred in a non-ira

10:02
account you can use these both in ira or

10:04
non-ira you can attach

10:06
income riders to them which is good for

10:07
income later type planning

10:09
the index option choices which there's

10:12
700 of them right now

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they're all kind of designed to create

10:16
that that cd enhanced cd type return if

10:19
planets align themselves so it's almost

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kind of a dart throw in my opinion

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you know and you can get out i guess the

10:25
benefit is there's some liquidity you

10:26
can get out with most carriers and most

10:28
products indexing new products you got

10:30
10 percent of your own money

10:32
penalty free people say well i can get

10:33
up 10 well that's your own money i don't

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think that's a

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huge benefit but there are some

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liquidity provisions in there that i

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think

10:40
that are good but understand that right

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now

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i guess a limitation that i forgot to

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point out was currently

10:47
and this is this is wrong i think this

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should be changed

10:51
indexed annuity companies are creating

10:53
in indices

10:55
index names or index compilations that

10:57
none of us have ever heard of because

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they haven't existed

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what they're doing is they're back

11:02
testing for a return

11:05
on an algorithm they're just throwing an

11:06
algorithm okay this basket

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returned x over the last 10 years let's

11:11
call it

11:12
you know the xyz option and let's attach

11:15
it to an indexed annuity

11:16
and then let's have the agent say if you

11:18
owned it in the last 10 years you would

11:20
have gotten this

11:22
i understand the intentions are good i

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get that but

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i don't think it should be sold like

11:26
that in fact there are some states like

11:28
arizona that's trying to prevent

11:30
back testing in general i agree with

11:33
that i don't think

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there should be back testing because

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that's like saying

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hey stan if you'd have done 100 setups a

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day for the last 10 years you'd have six

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pack abs

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you're right okay it's just it's as

11:44
ludicrous so

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take those back tested proposals with a

11:47
grain of salt because interest rates

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were different

11:51
markets were different economies were

11:53
different

11:54
so going forward you know you can't base

11:57
it's not like a stock it's not like a

11:59
mutual fund it's not like a money

12:00
manager

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okay in my opinion you should not base

12:04
that so that's what's happening

12:05
they're creating these these indices out

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of midair i think there's 50 or 60 of

12:09
them now that we've never heard of

12:10
that you can say hey this x y z

12:14
thing did did this 10 years ago and my

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question is has it been around 10 years

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no we just we just created it okay i

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don't like that and i think there should

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be a law

12:23
in place or that not a law that that

12:26
congress does or anybody else does but

12:28
a law in place by the industry the

12:30
industry should regulate this it says

12:32
if the index has not been in place for

12:34
10 years then you can't use it

12:37
i think that would solve it so once

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again let's let's just kind of go over

12:40
quickly and

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if you ever needed an owner's manual

12:43
before you buy anything

12:44
it's my index annuity owner's manual

12:46
fixed indexing owners get that

12:48
go to the annuitymen.com and get that

12:50
because there's no way i'm going to be

12:51
able to go through every single thing

12:53
i'm just going to hit some high points

12:55
and then hopefully you get the book get

12:56
a quote and then we can get on the phone

12:57
and talk

12:58
but it was developed in 1995 in 1995 it

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was developed to compete with cd returns

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and hopefully beat cd returns so it's

13:07
not too good to be true

13:08
it's not market upside with with no

13:10
downside and i think

13:12
the low bar of you know just getting a

13:15
life insurance license and making a 70

13:17
on the test allows you to sell an

13:20
indexed annuity i mean

13:21
that's good and bad good because there's

13:23
the message gets out about this cd type

13:25
product the bad is

13:26
you have people out there that are that

13:28
are pushing the limit a little bit on

13:29
the

13:29
on the sales presentation so you know if

13:32
it sounds too good

13:33
to be true it is every single time the

13:36
good news is there is no downside it's a

13:37
fixed annuity

13:39
but there's limited upside and if you're

13:41
looking at an

13:42
indexed annuity i think you should be

13:45
looking at a miga fixed rate annuity as

13:47
well so if a my let's say a five-year

13:49
myga

13:49
guarantees four percent and an indexed

13:52
annuity has a cap of three and a half

13:53
percent meaning

13:54
that's all you can get you should buy

13:56
the miga i mean

13:58
at the end of the day this is math this

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isn't about the agent

14:01
and the commission they're getting this

14:02
is math this is what's in your best

14:04
interest

14:05
also too do you want to lock in an

14:07
indexed annuity for seven to ten years

14:09
or do you want to buy a shorter term

14:11
miga

14:11
for three to five it means not an

14:14
investment

14:15
i know it's sold as an investment but in

14:17
essence it's a contract

14:19
in my pills and i always tell people

14:21
annuity solve for

14:22
four primary things and the acronyms

14:24
pill p stands for pension protection i

14:26
stands for income for life l stands for

14:28
legacy and the other l stands for

14:29
long-term care

14:30
confinement care there's no g in there

14:32
there's no

14:33
there's no m in there for market growth

14:35
m g i mean

14:36
if you want to do that in my opinion

14:38
having been on the other side with

14:40
morgan stanley dean witter payne webber

14:42
ubs i've seen

14:43
real growth then you need to be in the

14:46
in

14:46
market type investments there is no too

14:48
good to be true

14:49
market upside with no downside and and

14:52
be careful with the hybrid and all the

14:54
renaming of all this stuff

14:56
it's a fixed annuity period it is what

14:58
it is

14:59
so you can attach the good news is you

15:02
can't attach these

15:03
income with the way we use indexed

15:04
annuities primarily

15:06
is a as a delivery system for the income

15:10
rider attachment when you need to solve

15:12
for

15:13
for income later that's that's the

15:15
primary i think that's the primary way

15:18
they should be used or they're used as a

15:21
cd type

15:22
return product that's fixed but not

15:25
market

15:26
not pine sky not butterfly unicorn's

15:28
chest and the butterflies just be

15:30
rational about it okay i mean

15:33
if there's one thing i wish people would

15:35
do is just stop

15:37
don't believe the hype as one of the rap

15:39
artists said a long time ago

15:41
don't believe it because it doesn't it

15:44
doesn't work now

15:44
index option strategies we could get

15:46
lost in the weeds there forever

15:49
i mean there's in in my book and i'm

15:51
flipping through the pages now

15:52
i go through spreads and caps and all

15:54
kinds of you know how they do that

15:56
you know high water marks and point to

15:58
point i do all of that i go through all

16:00
of that

16:01
but to do that in a podcast would be

16:03
like showing paintings to blind people

16:06
no offense to blind people it's just

16:08
hard to paint that picture i actually

16:11
actually show it on paper and i have

16:14
numbers

16:14
in there etc for you know how to how to

16:18
do it

16:18
one of the things i like using the index

16:20
annuities for is what i call a mixed

16:21
fixed

16:22
ladder which is you know summon a myga

16:25
summon an

16:26
index annuity etc laddered over

16:29
specific durations that's a nice way to

16:32
do it like for instance you do a three

16:33
year myga a five year

16:35
ga and a seven year index annuity

16:38
with no income rider because if you

16:39
don't attach an income rider to

16:42
an indexed annuity then there's no

16:44
annual fees

16:45
the writer the attachment that's what

16:48
creates the annual fees

16:50
so when people say all annuities are

16:53
expensive

16:54
that's not true okay they can be

16:57
expensive if you start attaching riders

16:59
and there are some variable annuities

17:00
that are expensive from the standpoint

17:02
of fees etc

17:03
but to say all annuities expensive is is

17:05
misleading and dumb

17:07
because indexed annuities standalone

17:10
with no riders attached

17:12
have no annual fees the the commissions

17:15
are high if it's a long-term product

17:17
long-term surrender

17:18
charge but those are hidden and it's a

17:20
net transaction to you that doesn't mean

17:22
it's good

17:23
but it is what it is so look at indexed

17:26
annuities just like you look at all

17:28
other annuity types that i talk about

17:30
they're commodity products shop them for

17:33
the best

17:34
contractual guarantees out there

17:37
try to keep the durations short as

17:40
humanly possible

17:42
you know someone's trying to sell you a

17:43
10 to 12 year index indexed annuity

17:46
i'm not saying that's bad i'm just

17:47
saying if they're only showing you one

17:49
product then they

17:50
that's not good you should always i

17:53
don't care what annuity type

17:54
especially indexed annuities you should

17:57
be shown three to five

17:59
different carriers that solve for the

18:01
two questions what do i want the money

18:02
to contractually do and when do i want

18:04
the contractual guarantees to start

18:06
and then base your base your decision on

18:09
that

18:10
knowing that indexed annuities

18:11
historically

18:13
are going to return cd or a little bit

18:15
better than cd returns hopefully that's

18:18
what they're designed for

18:19
but you can get lost in the weeds with

18:22
all of the

18:24
caps and spreads and all the limitations

18:26
on how they determine

18:28
what the gains are for that contractual

18:30
year just just remember that the

18:33
the s p index that's typically used it

18:36
does not include dividends and like i

18:37
said previously

18:39
that represents historically that's

18:41
represented over 50

18:42
of the returns of the s p so if you if

18:44
you take that away

18:46
you have to take that into account if

18:47
you add an income rider to an index

18:49
annuity

18:50
that's coming out that fees coming out

18:52
of that index annuity return

18:54
so you have to add that in as well so

18:58
i'm not saying they're bad because

18:59
they're not i think they're sold

19:01
improperly

19:02
too many times by agents who either

19:04
don't understand the product fully

19:06
or just just trying to sell the sizzle

19:09
and not talking about the steak

19:11
and hopefully this podcast will kind of

19:13
break people down a little bit and make

19:15
make uh make the industry and some of

19:17
the presentations

19:19
tell a little bit more about the

19:20
downside of it because right now

19:22
people are attaching all kinds of names

19:24
and and monikers and marketing things to

19:26
it

19:27
to try to sell it at the end of the day

19:28
it's enhanced cd so with that

19:30
let's go into some of the frequently

19:31
asked questions i'm at the back of the

19:33
the index annuity owner's manual

19:35
that you should get once again the

19:37
annuityman.com to get the book and the

19:39
and a quote and also the annuityman.blog

19:42
to get a lot of the answers uh i've got

19:45
a frequently

19:46
asked question session there that i i've

19:48
recorded in other words you

19:50
see the question click the play button

19:51
tonight and i answer it

19:53
so that as well and if you have

19:54
questions just let me know at stan

19:56
theannuityman.com

19:58
let's just go through the questions some

19:59
of the questions i'll just pick them out

20:00
not all of them

20:01
remember they were fia introduced 1995

20:05
sources which are pretty good told me

20:07
that it was keyport life and lincoln

20:09
benefit life that

20:10
that offered the first ones i kind of

20:13
remember that i was in the business

20:15
but you know there's a lot of products

20:16
that are introduced when you're you know

20:18
with the big firms and they

20:19
just come across your desk and but i

20:21
kind of remember seeing that way back in

20:23
the day

20:24
why does it seem like everyone's pushing

20:25
fias i don't know it's a good story

20:27
if you're allowed to say market upside

20:29
with no no downside that's a good that's

20:31
a good pitch that's a good line

20:32
it's just not true and they shouldn't be

20:34
using the word market

20:36
unless their securities licensed so

20:39
typical agent commission on an indexed

20:40
annuity it can be anywhere from

20:42
depending on the duration remember it's

20:44
all about surrender charge so if it's a

20:46
10-year surrender charge

20:47
it could be anywhere from six to eight

20:49
percent don't hold me to that because

20:51
they're all different but let's just

20:52
range it at that which is a lot of the

20:55
total which

20:56
is the reason that if you say i'm

20:58
looking for cd type return you should

21:00
see a myga

21:01
which is a kind of one percent type

21:03
commission that's built in

21:04
but they're not showing that they're

21:05
showing indexed annuities so a lot of

21:08
it's commission driven i'm not saying

21:09
all of it is

21:10
you know caps and spreads and

21:11
participation rates you know you really

21:14
kind of need the book to go into that

21:15
and uh without i could spend and i might

21:18
i might spend a podcast

21:19
all on that and it'd be good because you

21:22
know you could put it on right before

21:23
you go to bed and just sleep like a baby

21:25
because it's boring and it's just it's

21:27
just ugly math and it is what it is

21:30
our upfront bonus is too good to be true

21:32
on indexed news yeah they are

21:34
uh it's just part of the overall

21:35
contractual guarantee you shouldn't put

21:36
any weight on it you shouldn't think

21:37
it's free money you shouldn't think

21:38
there's a philanthropist out there

21:40
giving away money at the annuity company

21:41
they're not

21:42
it's just part of the overall

21:44
contractual guarantee of which we

21:45
run through the quote and we you know we

21:48
see if it

21:48
if it makes sense a lot of cases it

21:50
doesn't by the way

21:52
winner fi gains locked in typically on

21:54
the contract anniversary date most of

21:56
them

21:57
most some are different but most allow

21:58
you to

22:00
to only lock in gains on the contract

22:01
anniversary date another 364

22:03
you really can't do anything that can be

22:06
good or bad as you know as you can think

22:07
about that that's that could be good or

22:09
bad

22:09
but the good news is once those gains

22:11
are locked in if there are gains

22:13
they're locked in permanently if there

22:14
are no gains in the market went in the

22:16
toilet

22:16
you get zero which is good right that's

22:19
there's no loss

22:20
but you know blended returns that that

22:23
blends out into those cd type

22:25
return so um how many carriers offer

22:28
indexed annuities i'm going to guess

22:30
you know 25 to 30 plus i don't know

22:33
enough to quote them all and see who has

22:35
the best and use them and look at as a

22:38
commodity

22:38
product so you know most of these are

22:41
sold with income riders i'm kind of

22:42
flipping through

22:43
some of the questions you can buy can

22:45
you buy an fia

22:46
index annuity inside of an ira

22:48
absolutely you can you can buy it

22:50
outside of an ira

22:51
should young people buy it i don't think

22:53
so i think if if you're young

22:56
40 less in my opinion i'm sure there's

22:58
agents disagree but my opinion you

23:00
should be in the market you should be in

23:01
real stock market growth type stuff

23:04
i really believe that the indexed

23:06
annuities

23:07
are a great and simplistic and efficient

23:11
way to deliver the income writer benefit

23:13
for income later planning

23:16
okay because typically the income riders

23:19
attached to indexed annuities

23:20
typically not all the time but typically

23:22
outperform the ones attached to variable

23:24
annuities

23:26
so you know that's a good thing so

23:28
that's kind of how we use them

23:30
we use them that way for the for the

23:32
income right we also use them in a mixed

23:33
fixed ladder with

23:35
but what i can say in in closing with

23:37
index annuities is hey get the book

23:39
you know b take your time don't buy

23:43
don't don't have anyone strong arm you

23:44
into into buying something

23:47
and be careful out there because

23:48
unfortunately there's a lot of things

23:49
being said about index annuities that

23:50
are untrue

23:52
and that are just trying to attract

23:53
people to believe that it is too good to

23:56
be true

23:57
it isn't these are contracts but if used

23:59
properly and understood

24:01
in full for the benefits and limitations

24:02
indexed annuities have

24:04
their place and we certainly can show

24:06
those to you and we represent those

24:08
carriers

24:09
so with that make sure you go to my

24:10
website and get the book and

24:13
get a quote feel free to contact me

24:15
anytime at stan

24:16
the annuityman.com and with that my name

24:19
is stan the annuity man and you have

24:20
been

24:21
listening to fun with annuity see you

24:24
next time

24:26
thanks for listening to fun with

24:27
annuities please hit the subscribe

24:29
button and make sure to go to my site

24:32
at the annuityman.com where you can run

24:34
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24:35
spea dia and culat quotes and see a live

24:38
feed of the best

24:39
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24:42
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24:42
indexed and income rider quotes as well

24:45
you can also

24:46
sign up for my six annuity owner's

24:48
manual books and i'll ship them for free

24:50
and under no

24:51
obligation i also encourage you to

24:53
schedule a one-on-one call with me

24:56
stan the annuity man so we can have a

24:58
full discussion

24:59
of your specific situation it will be

25:02
the best

25:02
brutally factual and truthful advice you

25:06
will ever get and that's one guarantee

25:08
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25:13
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