Equity-Indexed Annuity vs. Fixed Annuity

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Hi there. Stan The Annuity Man, America's annuity agent, licensed in all 50 states and Puerto Rico,

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founder of CGO, Contractual guarantees only. We only look at what a policy will do,

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not what it might do. Not hypotheticals and theoreticals, unicorns chasing the butterfly

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nonsense, crap seminar vomit that you go see that most agents and advisers will pitch because

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they're pitching dreams. We're looking only at the contractual realities of the policy.

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Today's topic's a good one, which is equity index annuities, which are now called index annuities or

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fixed index annuities, versus fixed annuities. Two types of annuities. Which one's better? Which one

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should I choose? What's the truth about them? Stan The Annuity Man. I tell you that after this.

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Alright, so let's talk about equity index annuities. When I first came out here decades

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ago from Morgan Stanley, UBS, all those places, Dean Witter, PaineWebber, and I

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came into the annuity space, in 1995 equity index annuities were introduced. Since then,

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the product has changed its name to fixed index annuities. And the reason the name

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was changed is because, all of a sudden, life insurance agents thought that they

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were stockbrokers and thought that they were masters of the universe, wealth managers.

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"I'm going to manage your money with an equity index annuity."

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The problem with that is they were put on the planet in 1995 to compete with CD returns.

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If you talk to any—hope you don't—but if you do talk to any higher-up person at

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a life insurance company that issues index annuities, they'll say, "Yeah,

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CD or better rates. That's what we're looking for. CD or better."

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And I'm like, "That's not how they're being sold."

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They're being sold as market products. They're being sold like securities,

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which they're not. They're being sold as market upside with no downside, principal protection with

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market participation. They're being sold as dream products, as all-in-one, with an upfront bonus.

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As I tell people all the time, 100 pennies in the dollar upfront bonus

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doesn't mean there's 20 cents extra. Or with one recently,

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I think the bonus was at 50%. There's not 50 cents extra to the 100 pennies on the dollar.

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Equity index annuities—now called fixed index annuities—do not have a guaranteed return. Okay,

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I'm going to say it again. Equity index annuities, now called fixed index annuities, do not have a

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guaranteed return with the three levers of the return: participation rates, caps, and spreads.

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Now, most index annuities have what's called a declared rate. If you don't want to do

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any of those three fancy things, you can do what's called a declared rate. To me and you,

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that's a fixed rate, but typically it's horrible. It's like half of what a fixed annuity would be.

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So let's talk about a fixed annuity. That's a multi-year guaranteed annuity, but it's a

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fixed-rate annuity. It pays a fixed interest rate for a specific period of time that you

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choose. Durations can be as short as one year and as long as 10 years. Some are longer than that,

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but typically it's one through 10 years where people lock in that guaranteed interest rate.

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No moving parts. No annual fees. No market attachments. If you love CDs, you'll love MYGAs.

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What's the difference between a CD and a MYGA, son? A CD is issued by a bank or brokerage firm.

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A MYGA is issued by a life insurance company. And in a non-IRA account, a non-qualified checking

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account-type account, the interest grows and compounds tax-deferred.

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Fixed-rate annuity: guaranteed. Fixed index annuity: not guaranteed.

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The only thing guaranteed about a fixed index annuity is that you're

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not going to lose money because the index options can just be out of the money.

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Not guaranteed. Guaranteed.

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So the question is, if your goal—and we ask two questions all the time: What do you want

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the money to contractually do? When do you want those contractual guarantees to start?

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If you say, "I want principal protection, Stan"—your PILL: Principal protection,

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Income for life, Legacy, Long-term care—I want the P, principal protection. Well,

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you're down to these two products: fixed index annuities, also known as equity index annuities

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in the past, and fixed-rate annuities. Those are your two principal protection products.

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One's guaranteed—the fixed-rate annuity, MYGA. One has no guaranteed return.

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If the markets went south, let's just say you put $100,000 in each one of

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these. The fixed-rate annuity—let's just pick a percentage. Pick it in your head.

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It's going to pay that percentage for the five-year term that you chose.

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And you chose a five-year index annuity. If the market goes and takes a big, glorious dump,

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you're going to get zero. Over here, you're going to get the guaranteed interest rate.

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I mean, don't make it any more difficult than that.

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"Well, Stan, if you hate that side..."

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Don't hate that side. We sell more index annuities than probably anybody.

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Why? Because we use them as a delivery system for income riders when income is

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what your goal is starting at a future date. We just ignore the index annuity.

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So, in other words, draw a line down a blank sheet of paper. Index annuity over here. Income

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rider over here. Ignore this. We focus solely on the income rider. That's what we do. That's the

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contractual guarantee of the policy. We don't care about this over here. It's a bad CD. Who cares?

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But if you said, "My goal, Stan, is principal protection and a good interest

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rate that's guaranteed," multi-year guaranteed annuities all day long and a bag of chips.

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If that was your goal and you chose an index annuity over a multi-year guaranteed annuity,

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you're stupid. Your brain isn't working. Or somebody locally said, "Well, if you

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get this one over here, you get an upfront bonus. You get an upfront bonus over here."

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Come on, man.

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There's nobody in an annuity company waking up in the morning going,

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"You know what? I want to give money away because I love the people."

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No. There's nobody. They're capitalist pigs, and I love them for that. That's the annuity industry.

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People always say, "Well, Stan,

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why do you like the life insurance company industry more than the brokerage industry?"

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Because they know when we're going to die. That's the reason they have the big buildings.

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And I personally believe—my opinion, for all you crazy people out there—my opinion,

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the life insurance industry is the safest place to put your money. My

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opinion. That's why I'm here. I'm here for the contractual guarantees only of the policy.

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The reason I can't lean in on the index annuity side, that product as

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a standalone, is it's not guaranteed. The only guarantee is principal protection.

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You know what else is guaranteed for principal protection? Digging a

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hole in your backyard and just putting your money in. That's principal protection, too.

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But for you to go into an index annuity sales pitch and sign the paper, going, "You know what,

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Martha? We're going to protect the money and get market returns," I mean, you get what you deserve.

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I hope it works out for you. I hope you're the 1% over here that gets

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that. I'm assuming there's 1% that gets that. I haven't met them yet.

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Now, I've been doing this for 30 years. Here's another thing about this side,

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the index annuity side. You get all these hypotheticals, theoreticals, back-tested,

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projected, unicorns-chasing-the-butterfly numbers.

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I've never seen one come true or be better. Ever.

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Why wouldn't we just get guarantees?

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Well, number one, this is the highest-paid commission product

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out here. All commissions are built in. You don't see them.

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It's a net transaction to you. This is the highest one. This is almost the lowest one.

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Now, if I was Annuity Czar—not for a day, forever—I would make all built-in

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commissions the same. If that happened, this side, this hype side, would go away quickly.

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So the question was: fixed equity index annuities,

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now called fixed index annuities, versus fixed-rate annuities.

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Fixed annuities. Fixed annuities. MYGAs.

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Principal protection. Guaranteed return. Guaranteed in the contract.

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Not guaranteed. Guaranteed.

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Hopes and dreams. Contractual realities.

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It's that simple.

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So yes, we use them, but we use them only for income riders. But the only

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reason we use index annuities with income riders is we can't

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buy the income riders as a standalone. They have to ride on top of a policy.

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An index annuity with an income rider provides the highest contractual guarantee,

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historically, for lifetime income if that is your goal.

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Remember, you're asking two questions: What do you want

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the money to contractually do? When do you want those contractual guarantees to start?

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And if your goal is market growth or a reasonable rate of return, don't buy annuities. Go buy the

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market. Jump on the bull's back and ride the bull. But don't fall for the sales

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pitch. Don't fall for the dream pitch because you're going to own the contractual realities.

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And if you buy what most people are pitching out here on the index annuity side, it's a

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10-year surrender-charge product in most cases. It's a long time.

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Do me a favor. Go to my website, theannuityman.com. I've written an

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owner's manual on both of these: MYGAs, MYGA Owner's Manual, Index Annuity Owner's Manual.

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Download them for free. Read them. Do everything you want to do.

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I've done a few videos—a few thousand videos—and I'm assuming there are

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hundreds on each that I've done. But I wanted to drive this home one more time.

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Okay, you can email me at [email protected].

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One last thing. Above my head—was that too high,

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V? Yeah, right here. I'll do this because I see it leaving the screen.

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Above me is a video that I did, "Why People Still Hate Annuities." And one

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of the reasons is that side over here—all the hype and overhype and bonuses and crap.

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Just tell the truth. That's why.

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But there are other reasons why as well. You'll get a kick out of that video. I had fun making it.

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Hope you give it a watch, and we'll see you next time on the Stan The Annuity Man YouTube channel.