Indexed Annuities: The Good, The Bad and The Truth

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The Good

Indexed Annuities are fixed annuities.  The story shouldn’t be any fancier than that.  That’s a good thing because your principal is fully protected from downside market volatility, which is a requirement for more and more retirees and baby boomers.   

Indexed Annuity returns are based on a call option on an index like the S&P 500.  A call option is a no risk bet that the markets are going up, and if they do, you will benefit from that growth. If the markets take a big dump like they did in 2008, then the call option expires worthless and you don’t lose any money.  The upside is limited, but the gains are permanently locked in on the contract anniversary date.  That’s my elevator speech and simplistic value proposition for Indexed Annuities.

If you are OK with CD type returns, then Indexed Annuities could work well in the principal protected part of your portfolio.  Let me be very clear, it is a contractual fact that Indexed Annuities are NOT a market growth product even though it seems like every agent on the planet is pitching it that way.  The strategy was designed to perform on the accumulation value side of the ledger.

Click here to read more in depth about Fixed Index Annuities

The Bad

Indexed Annuities might go down in financial history as the most over-hyped and mis-sold product ever.  Unless the annuity industry and carrier reel in this ongoing sales pitch nonsense, Indexed Annuities are destined to be a class at business schools everywhere on how a good product was run into the ground by an unregulated sales force. 

The typical agent pitch is “market upside with no downside.”  Only half of that statement is true.  True there is no downside because it is a fixed annuity.  If the sales pitch statement was actually true, then Janet Yellen’s job at the Federal Reserve would be solved.  Nobody can promise market upsides. As you should know by now, the statement can NOT be true.

If you listen to local radio, watch cable TV ads, or troll the internet, you are going to run into the unregulated sales message that permeates the Indexed Annuity world.  Anything can be said, claimed, or promised to get the almighty sale.  It’s a disturbing trend that continues to grow because there are no repercussions for the anything goes Wild West sales atmosphere.  It’s a real tragedy unfolding right in front of an apathetic annuity industry that doesn’t want to interrupt the ever increasing premium inflow.

Because Indexed Annuities are NOT a security, and classified only as a life insurance product, it is supposed to be regulated at the state level.  Let’s just say that’s not happening!

The Truth

In 1995, Indexed Annuities were first developed and designed to compete head to head with CD (Certificates of Deposit) returns, not the stock market.  That is a fact that most annuity agents don’t even know, but a contractual reality if you ever purchase an Indexed Annuity contract.

Indexed Annuities are also an efficient delivery system for attached income rider benefits for future income guarantees.  In fact, that is how I primarily use Indexed Annuities.  I really don’t even look at the accumulation part (i.e. index option) of the policy in most cases.  The majority of the time I only look at the income rider guarantee for “income later” needs.  The reason for this is that I think you should always own annuities for what they “Will Do, not might do.”  Translation:  Contractual guarantees deliver!

In specific situations, I do use short term Indexed Annuities in combination with Fixed Rate Annuities (aka MYGAs) for laddering strategies.  I call that my “Mixed Fixed Ladder” because it’s a combination of Fixed Rate and Indexed Annuities.

Click here to read further about Laddering Annuities

The bottom line is that Indexed Annuities are NOT too good to be true, but they can be pretty darn good if your expectations are in line with the contractual realities.

Click here to read More about MYGAs