What Is The Participation Rate In An Indexed Annuity?

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What is the participation rate on an indexed annuity?

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Hi there, my name is Stan the Annuity Man, America's annuity agent, licensed in all 50

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states, top agent in the country. Written a book on indexed annuities that I would love

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to point you to. You can download it for free. But we're going to get into really

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just a little bit more about indexed annuities than just the participation rate after this.

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So, if you're watching this video, someone's probably trying to sell you an indexed

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annuity. And everybody you've ever run into in the financial business, for whatever reason, they're

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now trying to sell you an indexed annuity. Why is everyone trying to sell you an indexed annuity?

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All I can tell you as the annuity man, the top independent agent in the country, is it's not

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because it's the best product on the planet. Not a bad product. It was put on the planet in 1995

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to compete with CD returns, not market returns. It is not a market product. It is not a security. It

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does not require a securities license to sell. It requires a state life insurance license to sell.

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So right there, you need to kind of understand this product is not for market returns. Okay.

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So, when we talk about participation rate, index annuities have a few levers that limit

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the growth or limit the upside: participation rate, there's a cap, there's a spread. I've

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done videos on this. I'm going to encourage you to go and take a look at those. Also,

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at my site, theannuityman.com, I've written an indexed annuity owner's manual that you can

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download for free. And it is a treasure trove of facts — and the facts that you're not going to hear.

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Now, in 1995, when index annuities were put on the planet to compete with CDs, really since

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that time, that's what they've done. Historical returns since 1995 — one of the biggest bull markets

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of all time at the time of this taping, look at the date — they just have not performed as they are

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pitched to perform. Now, there's some people out there that tell the truth about index annuities,

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but most of the calls that we get are something to this effect: “Hey, Stan, this guy said I could

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get a 20 or 25% upfront bonus. He said I could get market returns with principal

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protection,” and then they'll add something like, “and free long-term care,” whatever.

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But let's talk about the market returns with principal protection. The principal

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protection part's absolutely true. It's a principal protection product. But the

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market returns part really is not true at all historically, just based on facts. Okay.

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Now, we sell index annuities only when someone needs income for later,

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and that income rider has to be attached. So, we're only focused on the income rider as a

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contractual guarantee. We're not looking at the caps and the spreads and the participation rates.

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Now, caps and spreads and participation rates — just understand that those are limiting levers to the

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growth that's being promised. And with most index annuities — and I'm trying to keep it out

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of the weeds here — most index annuities, the companies can change those rules on how those

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caps and spreads and participation rates — those percentages are — when you renew. And typically,

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it's annually. There are some index annuities that are longer than that — two years, three years, four

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years — but most of them are one year in length. So, from point to point, you know, you get to

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lock in the gain. But just understand, here's something agents typically never tell.

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If the S&P 500 is the index of choice within your index annuity, that does not include dividends.

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And you say, “Well, wait a minute, Stan. Why is that important?” Because over 50% of the

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returns of the S&P 500 are dividend-based. So if you're not including the dividends,

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and you can only lock it in one day per year — the other 364 you can't do anything — your

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level of expectation of returns has to be in line with reality.

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Now, I know what you've been sold. You've been shown: “Hey, Mr. Jones, if you'd have owned it

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10 years ago, look what you would have made. Hey, Mr. Jones, here's our back-tested numbers. Here's

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the unicorns chasing the butterflies.” All I can say is just don't fall for that. You know,

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the first rate that you get with an index annuity might be good. Years two, three,

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four, five might not. But never buy it for market growth. Buy it for principal protection,

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or buy it for an income rider that's going to provide lifetime income.

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And if you're going to buy that,

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if the reason you're buying the index annuity is for income in the future,

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then shop all income riders for the highest contractual guarantee. That's a commodity product.

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So, once again, I mean, I hate to kind of poo-poo this whole index annuity thing,

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but the way it's being sold out there is horrific. It's been horrific for

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a decade. And some people just sell index annuities. It'd be like some agents — that's

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all they sell. It would be like a doctor where they only prescribe one medication.

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There's many types of annuities, okay? Index annuities are not a one-size-fits-all product.

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It's not a market product. It's a principal protection CD product. That's what it is,

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and that's what it was designed for. That's not how it's sold.

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So, if anyone's talking markets, stock market, growth of a stock market,

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potential growth of a stock market with index annuities, and then they throw in

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a participation rate or a cap or a spread, it's garbage. I hate to say that. You know,

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if you bought it for CD returns, great, super. If you bought it for principal protection,

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great, super. Don't ever buy it for a bonus. Bonus is candy for the stupid.

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There's not an annuity CEO that wakes up in the morning and says, “You know what?

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I want to give money away today.” It doesn't happen. There are 100 pennies in the dollar.

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And typically, that upfront bonus that sounds so juicy goes to the income account, which is

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a phantom account anyway. You can't cash it in, can't pull out any interest, you can't transfer

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it. It is only and solely there to calculate your first income payment. And that's okay.

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But just because it's a high upfront bonus doesn't mean that it's going to be the highest

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contractual payment. In fact, what we found over the decades is that the bonuses don't

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equate into the highest payment. So when you go to our site and you do income rider quotes,

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we're factoring in all the ones with bonuses, all the ones without bonus. It doesn't matter to us.

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It's just part of the contractual guarantee. And then all you should care about is the number. What

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is that contractual number? Whether it's on your life or you and your spouse's life, etc.

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So, once again, if you really want to get in the weeds and learn what a cap and a spread,

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a participation rate is, download my book at my site, theannuityman.com. That's a free download,

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70–80 pages, and I get in it. I explain it. If you want to geek out and figure it out, that's fine.

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If you're at my YouTube channel, if you go to my YouTube channel and go to the video section,

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we've segmented the videos I've done on index annuities and caps

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and spreads and participation rates, and we've done examples and all that stuff.

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The problem is this: with most indexed annuities, the carriers can change those

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participation rates, spreads, and caps at their discretion. So, in essence,

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you might like the participation rate year one, but you signed a 10-year contract. So,

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the question is, what's going to happen year 2 through 10? Only the carrier knows.

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So, in essence, you're buying a one-year guarantee

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on an index annuity with a 10-year surrender charge. Think about it.

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If you have to buy from your brother-in-law that's selling the index annuity, then ask them,

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“Do you not sell anything else, or is this just the best product ever?” And

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if they say it's the best product ever, they're lying. It's a good product. It's

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a CD product. It's a principal protection product. It's not a market growth product.

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As long as you remember that from this video, then I've done my job. If you come away with this

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going, “I don't believe it. I think I get market upside,” then go for it. Knock yourself out,

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and then call me two years later and then apologize because I told you so. Okay?

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Everybody that's bought an index annuity from us bought it because there's an income

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rider attached. We never even talk about the accumulation side. Okay?

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Do me a favor. Go to my site, download that book on indexed annuities, take a look at that,

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schedule a call with us. We'll talk about it. If you want to talk to me, send me an email,

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[email protected].

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One last thing: above my head is a video that I'd like for you to click, and it explains the process

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of how our paperwork process works if you want to become a client and how that works from start to

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finish. Whether it's an IRA, non-IRA, Roth IRA, doesn't matter. I'm going to explain that to you.

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So, hit that, and we'll see you next time.