Fixed Index Annuities

Indexed Annuities were originally created to compete with CDs
Indexed Annuities were originally created to compete with CDs. Image Source/Getty Images

Indexed annuities are not all that the advertisements build them up to be.

Indexed Annuities were actually designed and introduced in 1995 to compete with CDs returns, not the stock market. Fixed Index Annuities (FIAs) are also called Equity Indexed Annuities or just Indexed Annuities.  It’s important to have realistic return expectations with FIAs and not to fall for the common agent sales pitch of “market upside with no downside.” The only part of that pitch which is true is the “no downside” piece.

Fixed indexed annuities are inappropriately and incorrectly referred to as “hybrids” as part of a too often over-hyped sales pitch. It makes it sound like they really over perform, but in reality they do not.

Most lock in gains (if any) on the contract anniversary date, and those gains are limited by caps and spreads with the option strategy. Some indexed annuities have longer option periods (2 years), and offer different index choices other than the S&P 500. It’s important to point out that index gains do not include dividends on the S&P 500.

FIAs lock in any gains only yearly on the contract anniversary date.

Index options with FIAs typically start calculating index growth when the policy is issued, and there are numerous index option choices within a FIA with names like “annual point to point”, “annual sum”, and “monthly sum” and numerous other strategies including a fixed rate credited for the year.

You can mix and match all of the option choices provided (every FIA is different) with the percentage allocations having to equal 100%. For example, you could have 30% in the fixed rate, 35% in the annual point to point, and 35% in the monthly sum. You have the opportunity to change these choices annually, and the index levels are reset on the contract anniversary date as well.

FIAs can compete with Certificate of Deposits.

Fixed Index Annuities (FIAs) were designed to compete with CDs, and work well when those realistic return expectations are understood and allocated properly within a portfolio. FIAs are also efficient delivery systems for utilizing the future income guarantees on attached benefit income riders.

FIAs can be laddered with MYGAs and have no annual fees with no riders attached.

They provide the ability to permanently lock in index option gains on an annual basis, and you can also change your option choices as well on the contract anniversary. Indexed annuities can be purchased with as short as 4 year surrender charge periods, and carry no annual fees if no riders are attached. The product can offer unique laddering strategies as well. A laddering strategy called the Mixed Fixed Ladder uses both MYGAs and FIAs in tandem. 

Fixed Indexed Annuities are useful to some, but sold as if a godsend to all, which they are not.

Fixed Index Annuities (FIAs) are the most over hyped, over promised, and mis-sold products in the world of annuities. Whether it’s the inappropriate use of the word “hybrid”, unregulated promotional ads and videos on the internet, or the local bad chicken dinner seminar, the sales world of indexed annuities is the true wild, wild, west.

Too many agents with too little financial advisory experience have latched on to the FIA story with its high commission product structure.

It takes an agent about a week to get licensed to sell Fixed Index Annuities (FIAs), because they are defined as a life insurance product and not a security.  It is important to keep in mind exactly what  the agent qualifications are to sell them.  It is information that can help keep your vision on the realities of the products instead of falling for the hyped up sales pitches. The indexed annuity sales industry goes pretty much unregulated with the existing rules not being enforced by the states that oversee the product. Anything can be said and promised to achieve the sale, and too often this is the case.

The truth is that Fixed Indexed Annuities are useful, but only with reasonable expectations on returns. These are not products that provide miracle market returns!

The typical Fixed Indexed Annuity sales pitch is “market upside with no downside”, which is partially true.

Yes, there is full principal protection with no downside, but the returns do not typically provide real market upside. FIAs have historically provided similar returns to CDs, but those returns are not guaranteed. Indexed annuities do have a place in some portfolios, but are not “too good to be true” or “one size fits all” as commonly promoted. 

Do your homework! Don’t buy the dream. Buy the contractual realities of the annuity policy.