If you are an adult with investments or nearing retirement, there is a pretty good chance you will be pitched a Fixed Index Annuity (FIA) by your banker, broker, or some eager annuity agent. It’s going to happen, so you better be able to “translate” that too good to be true story you are probably going to hear.
As "America's Annuity Agent," I do recommend FIAs when appropriate and suitable for their contractual guarantees only. However, too many sales pitches revolve around what I call "the sizzle, not the steak." Let’s dissect the top 5 most common “buzz phrases” you are going to have to translate concerning FIAs, and the brutal facts and contractual realities about each one.
“Market upside with no downside” or “Market participation with principal protection”
Factual Dissection: FIAs are life insurance products, not securities, and were designed and introduced in 1995 to compete with CD returns. Since that time, CD type growth has been the historical return range for Fixed Index Annuities. It takes a state life insurance license to sell FIAs, and they are issued by life insurance companies.
Contractual Reality: There is nothing wrong with protecting your principal regardless of market volatility. I've always said that if some of the FIA sales pitches I have heard were true, then that's all the Fed would buy. FIAs can be an efficient delivery system for attached income rider benefits for future lifetime income guarantees, while retaining full control over the asset.
“Free BONUS for just filling out the application”
Factual Dissection: There are no philanthropists at annuity companies. No CEO is waking up daily wanting to give away money. Nothing in life is “free.” That applies to these FIA bonuses as well. With 100 pennies in every dollar, FIA upfront bonuses are just part of the overall contractual guarantee picture.
Contractual Reality: Always quote FIAs for the highest contractual guarantee for your specific situation. Sometimes "bonus products" finish first and sometimes they don't.
“8% annual growth on your money”
Factual Dissection: There are not geniuses at annuity companies that have figured out how to produce actual “Jimmy Carter Yield.” These high % numbers are used with Income Riders, and are monopoly money…but sometimes pitched by agents to have you believe otherwise. You can’t peel off the interest or cash in this high percentage amount. It is only used to calculate the first income payment.
Contractual Reality: Once you understand that high income rider percentages are not actual yield, you can then focus on the transfer of risk benefit they actually provide. Income riders are attached benefits that guarantee lifetime income stream at a date in the future that you choose. That's a good thing for you planners out there because you can know to the contractual penny what your future income stream will be.
“Free Long Term Care Coverage” or “Long Term Care Doubler” Rider
Factual Dissection: Just remember The Annuity Man’s simple catch phrase concerning this pitch, “when you get sicker, you get your money back quicker.” That’s it. Nothing more to see here. Real Long Term Care is a health insurance product, and still the best coverage available for that specific transfer of risk goal. In a perfect world, these “confinement care’ riders should only be used as secondary coverage.
Contractual Reality: This type of guaranteed issue rider is your only option if you can't qualify for real long term care coverage. That's a good thing if this type of rider is the only coverage you can get. However, if you already have a LTC policy, never cash in that policy for these types of riders.
“Our back-tested return #’s show phenomenal growth if you would have owned it then”
Factual Dissection: Any agent can “juice the numbers” to make the returns look good, and the current trend in the annuity industry is to create an index (out if thin air) that shows good back-tested numbers. Don’t fall for this. Please be smarter than that, and remember that FIAs were designed to compete with CD returns, not real stock market growth strategies. Some FIA return years might be better than others, but the blended return yield typically falls in line with CDs.
Contractual Reality: I wish the industry would ban back-tested proposal numbers because they are misleading. Hindsight is always 20/20, and the past never predicts the FIA future. In addition, I've never seen a back-tested, hypothetical, theoretical, hopeful agent return scenario come true.
FIAs do have their place in some portfolios, and when fully understood for their limitations and benefits. Just remember 3 things when it comes to FIAs:
- FIAs are life insurance products that are designed to produce CD type returns
- FIAs can be used as an efficient delivery system for Income Rider guarantees
- If the FIA sales pitch sounds too good to be true…it is…every single time…without exception.
Make sure to shop all FIA carriers for the best contractual guarantee for your specific situation, and not be steered toward just one or two offerings. Just like all annuities, FIAs are commodity products.