How do annuity companies make money on Fixed Index Annuities (FIAs)?
The Annuity Man
Fixed Index Annuities (FIAs) were developed and introduced in 1995 to compete with Certificate of Deposit (CD) returns. FIAs are fixed strategies and categorized as life insurance products. FIAs are regulated at the state level, and a state life insurance producer license is all that is needed to sell the product. Fixed Index Annuities are not a security.
FIAs are fixed annuities that provide principal protection and CD (Certificate of Deposit) type returns. Multi-Year Guarantee Annuities (MYGAs) are also fixed annuities that provide principal protection and CD type returns.
FIAs can also provide a lifetime income stream through annuitization of the contract or by attaching an Income Benefit Rider to the policy at the time of application. Income Riders are for future income needs and are a separate calculation from the potential index return part of the Fixed Index Annuity contract.
Fixed Index Annuities (FIAs) are often over-hyped and misrepresented to consumers with too good to be true sales pitches like "market upside with no downside" or "market particpation with principal protection." Both statements are not true. In addition, upfront signing bonuses to some FIAs are used as bait to get the sale. Upfront bonuses are just part of the overall contractual guarantee, and certainly not "free money."
Many FIAs are sold at annuity lunch type seminars or with misleading radio or TV ads that make the consumer believe the product is "too good to be true"....which it is not.
You can contact Stan if you have any questions or want to see quotes on your specific situation.