A Rational Approach to Owning Fixed Index Annuities (FIAs)

The Annuity Man

As my followers and enemies know, I’m not a fan of how FIAs (Fixed Index Annuities) are too often sold and promoted to consumers.  Bad chicken dinner seminars, misleading TV commercials, and a one size fits all approach are all bad PR for the annuity industry.  Many mistake my frustration with the over-hyped sales pitch barrage with a hatred toward FIAs.  Nothing could be more further from the truth. 

It’s time for me to spell out a rational and high IQ approach to owning this controversial product.  Hopefully, you fit that profile….and aren’t some dreamer that thinks a too good to be true product exits.  Spoiler alert…it doesn’t.

Let’s look at the top 5 things you need to know about Fixed Index Annuities (FIAs), and go over the details of each of these factual points.

  1. FIAs are FIXED ANNUITIES.
  2. FIAs are LIFE INSURANCE products.
  3. FIAs were designed to compete with CD RETURNS.
  4. FIAs work well with MYGAs and CDs for principal protection LADDER STRATEGIES.
  5. FIAs are an efficient delivery product for INCOME RIDER GUARANTEES.

FIAs are FIXED ANNUITIES.  This fact should tell you what the actual returns will be.  FIAs offer full principal protection, just like MYGAs (Multi-Year Guarantee Annuities)...and historically provide CD type (or a little better) returns.  For the record, MYGAs are the annuity industry's version of a CD.  FIA accumulation gains, that are typically attached to a 1 year call option, are permanently locked in on the contract anniversary date...with most policies.  By the way, that's a good thing...and unique to FIAs.

FIAs are LIFE INSURANCE PRODUCTS.  FIAs are not securities, and most FIA product offerings only require a state life insurance license to sell.  This is NOT a market growth type product, regardless of what you will hear.  It’s a life insurance contract between you and the issuing carrier.

FIAs were designed to compete with CD RETURNS.  Many agents selling FIAs aren't aware that this product was designed and introduced in 1995 to compete with CD returns.  And by the way, those are the historical return levels/averages FIAs have produced since that time.  There is NO “market upside with no downside” as too many agents will tell you.  If that product actually existed, that's all smart money (and the FED!) would own.  Don’t buy dreams because you will own the contractual realities.

FIAs work well with MYGAs and CDs for principal protection LADDER STRATEGIES.  FIAs provide CD type returns just like MYGAs.  It's important to point out that FIAs without any attached riders have no annual fees, just like CDs and MYGAs.  Laddering maturities using a combination of FIAs, MYGAs, and CDs is a principal protection "no brainer."

FIAs are an efficient delivery product for INCOME RIDER GUARANTEES.  This is how I primarily use FIAs….as a delivery system for future income guarantees using attached Income Riders.  You can choose to attached these contractual Income Riders at the time of application.  I call this “Income Later” planning, and I quote all DIAs (Deferred Income Annuities) as well as all Income Riders to find the highest contractual guarantee for your specific situation.  With over 10,000 baby boomers hitting retirement age every day, current and future income guarantees are very popular in a pension-less world.  FIAs with contractually guaranteed Income Riders allows you to know exactly what your future income payments will be while still retaining full control over the money.

That’s it from a Fixed Index Annuity (FIA) analysis standpoint.  Pretty simple, huh!

So the next time you hear a “too good to be true” FIA sales pitch, understand that with annuities...regardless of type...it is every single time…no exceptions.  But the reality is that FIAs do have their place in some portfolios when you fully understand the details (limitations and benefits) of the product. 

Just don’t fall for the sales pitch hype.  You are smarter than that.

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