Disadvantages of Fixed Index Annuities

The Annuity Man

Fixed Index Annuities (FIAs) are one of the most over-hyped products in the financial world today.  That is an unfortunate fact because FIAs are a good principal protection product and a very efficient delivery system for future guaranteed income using an attached income rider.

Fixed Index Annuities  (FIAs) were designed and introduced in 1995 to compete with CD returns, and that is exactly the return range they have produced historically.  Too often, FIAs are pitched as market return products.  This is not true.  FIAs are life insurance products, not securities, and are regulated at the state level.  It takes a state life insurance license to be able to sell FIAs.

The accumulation value of an FIA is based on a call option on an index.  Typically that index is the S&P 500, and the call option length is one year.  There are limitations to the upside growth using industry terms like "caps" and "spreads."  The good news is that any gain of the call option is permanently locked in on the anniversary date.  The bad news is that the index used does not include dividends.  That's a big deal when over 50% of the S&P 500 returns annually are dividend based.

Fixed Index Annuities (FIAs) are typically sold with attached income riders for future lifetime income guarantees, and some come with built in confinement type care benefits as well.  Upfront bonuses can also be offered for signing the application, but are just part of the overall contractual guarantees of the policy.

You can contact Stan if you have any questions or want to see quotes on your specific situation.


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