Q&A: What are fixed indexed annuities?
Q. My wife and I attended a presentation the other day by some alleged personal-finance gurus on “fixed indexed annuities,” and we left rather confused. I’ve spent two hours sweeping various Web sites and still feel there’s some information that either I haven’t found or I’ve missed. Can you point me at a reference that provides a comprehensive and comprehensible explanation of these instruments?
A. For a reference, you can visit the Financial Industry Regulatory Authority’s Web site and search “equity-indexed annuities.” But here are the basics: Fixed index annuities, previously called equity-indexed annuities, guarantee a fixed interest rate and then allow you to earn additional interest based on an index’s gain (such as the S&P 500). For example, if the index goes up 9 percent and the annuity’s participation rate in the index is 70 percent, the index-linked interest rate for your annuity will be 6.3 percent (9% x 70% = 6.3%). So you earn less than if you invested directly in the index itself, but you also lose less when the index drops.
But there are several reasons why we are not big fans of these products. Because there are several different methods of calculating interest, it’s very hard to compare products. The commissions on most of these annuities are high, so the insurance company that sponsors them pass on those costs to investors in the form of high fees. And since they’re classified as an insurance product, they are subject to fewer regulations than securities and may be sold by people who are not registered brokers.
However, that will change, but not soon. Last Friday the SEC posted a new rule on its Web site that would classify most indexed annuities as securities. Unfortunately, the rule will not take effect until Jan. 12, 2011.
Previous
Posted by: John Doskoch | Jan 23, 2009 8:03:29 PM
As an independent fee-only advisor I see these annuities sold to trusting seniors all too frequently... buyer beware. If it sounds too good to be true... you know the rest. They are complicated to understand, expensive to own and are subject to hefty surrender charges if you need to cash out in an emergency situation. The commissions are sky high so they are sold hard. Run, don't walk, away from these salespeople.
Posted by: Bobby Darwin | Feb 6, 2009 4:01:05 PM
I have sold indexed annuities for the last 10 years and my clients love them. The average return over that period has been 7.01% and that includes the market crash in 2000 and 2007. Most indexed annuities allow a 10% free withdrawal annually...who do you know that is spending 10% of their life savings every year? It is more liquidity than anyone should take. All the criticism of these great products is coming from the people on wall street who just lost 40% of the invested wealth of this nation. Indexed annuities not only guarantee your principal, but also your previously earned gains. The attack on these products are coming mostly from wall street salesmen who are jealous of the billions of dollars that are flowing into these safe vehicles.
Posted by: David Earnest of Montgomery(dearnest@cfiemail.com) | Feb 28, 2009 12:51:14 PM
You see I posted my name in full view!!!!!!!! I am VERY PROUD ( even though I have a securities license and do offer combination of products) that my main products and goals were INDEXED ANNUITIES. The past HAS SPOKEN!!!!!!!!!!!! The indexed annuities won!!!!!!!!!!!!!!!!! Anyone who has to wait over a decade to get a decent profit is KIDDING themselves. The so called expert advisers who pointed their clients to the dangers and pit falls of the markets will be hated forever. I am so glad I took care of my clients and I am proud of the annual average returns they made safely and are locked in from any market dangers forever!..so called experts our surrender charges are nothing compared to your losses and we have 10% free withdrawals or more at a average minimum. GO INDEXED ANNUITIES! The past shows they are the winners!!!!!!
David Earnest of Montgomery Alabama
Posted by: Frank Oliver | Mar 5, 2009 11:38:15 PM
Wall street and fee based money managers need to get off of their high horse. They have done nothing but cost retirees millions of dollars of their hard earned money. Fixed indexed annuities have the perfect blend of safety coupled with above average growth. When are money managers going to realize that safety has an important place in a portfolio. Does anyone believe that in a diversified portfolio that there is not profit being taken on their investments to profit Merril Lynch etc. What protection do they offer for their fees? Growth is not the only componet that creates a financial plan, especially when it is at risk of serious loss. Pensions have provided a comfortable retirement for years with safe predictible growth. Can you say that about the stock market? All vehicles have trade offs, just weigh them out its not that difficult.
Posted by: Frank Oliver | Mar 5, 2009 11:46:47 PM
John Doskoch,
Dont people have to BUY financial products? I encourage you to evaluate your position as a salesman!!! Have you ever sold a losing stock to a retiree that was out of your control?
Posted by: Ralph Venen | Apr 19, 2009 6:55:29 AM
It seems to me you are criticizing these financial products for the outcomes they are specifically not designed for. It doesn't take a financial guru to understand the concepts of principle preservation, lower risk, and sensible rates of return. We do not buy indexed annuities in order to beat the market upswing. In fact, we do just the opposite by protecting the principle against severe downturns in the market (created by the very industry brokers who criticize these products). Is this financial irony, ro indexed annuity envy?
Posted by: Compare Annuity | Apr 21, 2009 3:27:04 AM
Thanks for such a comprehensive answer of the question. Now it became more clear that what is fixed Annuity. Giving such information really helps people in many ways
Posted by: Annuity Ratings | Apr 22, 2009 4:36:31 PM
Hi,
It seems to be a satisfying answer for the question.
According to me,
An indexed annuity is a fixed annuity, either immediate or
deferred, that earns interest or provides benefits that are linked
to an external equity reference or an equity index. The value of
the index might be tied to a stock or other equity index. One
of the most commonly used indices is the S&P 500, which is
an equity index. The value of any index varies from day to day
and is not predictable.
Thanks.
Posted by: CFP in NJ | May 5, 2009 3:48:25 PM
Anyone that sold any annuity products previous to 2008 looks like a smart guy today. The problem with Indexed annuities vs. variable annuities is in the "black magic rate calculations, exorbitant commissions and "out of reality" lock in periods of 10-15 years! I have to sleep at night and not selling EIA is a no brainer for me.
Posted by: Ralph Venen | May 21, 2009 6:02:35 AM
CFP...you must be making money selling something? I would guess the commissions and fees on variable annuities are much less than lets say.......credit card interest rates? Who are you pointing the finger at anyway? Can you clearly state the difference in long term principle gains between indexed annuities and short term variable annuities? I think not.....Insurance may be the worst bet in Vegas, but when it saves a loss of 40% in the market why not celebrate it?
What is an "out of reality" lock in period for a retirement fund anyway?
Posted by: Gail Palubiak | Jun 26, 2009 10:43:36 AM
I won't comment on EIA/FIA's suitability for clients. However, the sales methods and claims I've witnessed by advisors who sell them is outrageous!! To tout these products as "no cost" and "completely risk free" is certifiably libelous. BE HONEST!!
Posted by: Patrick | Jul 8, 2009 6:01:17 PM
Gail you are obviously misinformed much the way a few others are on here.
EIA's are NO RISK to your prinicple...PERIOD. YOu cannot lose the money you put into them providing you don't break the contract. It's a contract...you are obligated to honor it! If you don't you get hit with surrender charges...that's the name of ANY financial game!
Fee based advisors are bullshit artists...and the only people they are fooling are themselves.
Yes there are fees if you want a Income Rider slapped on there...there is nothing wrong with that. You want to play...you got to pay.
Here's where it gets sticky...and where I agree with you Gail. The methods that sales people go to to sell these are indeed sketchy. Not all salespeople...don't let a few bad apples ruin the whole bunch.
But unfortunately there are scumbags in every industry and there isn't a whole lot one can do to keep them out. Your best defense is to go with your gut. If a sales person is pressuring you or it sounds too good to be true...back away from them. Do your homework on them.
And understand that if you break a contract...you will lose money!
If I break a contract with a landlord...I lose 3 months rent plus my deposit.
If I break my contract with my cell phone carrier...I pay $200.00
If I break my contract with my wife...I love half of everything I ever worked for!
You get the picture here folks. If you want the guarantees without risks...something has to give. And honestly it's not much considering all you have to do is honor your word by not breaking a contract!!!
Posted by: Jason Barlow | Jul 27, 2009 9:25:59 PM
I have been in the financial services industry for 12 years and I am securities licensed to sell mutual funds and variable annuities. In addtion I have a series 26 and have served as a supervisory principal for several brokerage firms......AND I ALSO AM LICENSED TO SELL EQUITY INDEXED ANNUITIES.
This is what I have to say about indexed annuities..........
There are some that are not so great for the client and their are others that are absolutely femonimal. The job of any good advisor, broker, financial planner, etc... is to meet the objectives of the client and actually do the best job for them.......PERIOD!!!
INDEXED ANNUITIES ARE ABSOLUTELY EXCELLENT PRODUCTS FOR ANY INVESTOR, ESPECIALLY IN IF THEY ARE IN RETIREMENT OR NEARING RETIREMENT IF THEY WANT THE UPSIDE OF THE MARKET BUT NONE OF THE MARKET RISK OR MARKET FEES.
THEY ARE THE ONLY INVESTMENT TO ALLOW THE CLIENT TO 100% PROTECT THIER PRINCIPAL AND GAINS FROM MARKET DECLINES WHILE ALLOWING THEM TO STILL BE POSITIONED TO BENEFIT FROM THE UPSIDE OF THE MARKET...........PERIOD!!!
THEY HAVE NO SALES CHARGES, NO LOADS, AND NO FEES (INCLUDING MORTALITY AND EXPENSE FEES OR ADMISTRATION FEES LIKE VARIABLE ANNUTIES).
THEY DO HOWEVER HAVE SURRENDER CHARGES AND IF THE CLIENT DOES NOT UNDERSTAND THEM OR THINKS THEY WILL NEED TO TAKE OUT MORE THAN 10% OF THE ACCOUNT VALUE THEN IT IS A SUITABLE INVESTMENT FOR THAT PARTICILAR CLIENT............PERIOD!!!
FOR ANYONE WHO SAYS THEY ARE TERRIBLE PRODUCTS OR THEY ARE NOT RIGHT FOR SENIORS OR THEY ARE FULL OF FEES IS EITHER:
1. WORKING FOR A BROKERAGE FIRM WHO DOESN'T ALLOW YOU TO SELL THEM
2. A FEE BASED PLANNER WHO ISN'T ALLOWED TO MAKE A COMMISSION FROM THEM.
3. COMPLETELY BRAIN WASHED FROM WALL STREET AND THINKS STOCKS, BONDS, AND MUTUAL FUNDS ARE GOOD INVESTMENTS FOR EVERYONE, EVEN THOSE PEOPLE IN RETIREMENT OR NEARING RETIREMENT.
PERIOD!!!!!
Posted by: Jason Barlow | Jul 27, 2009 9:55:24 PM
ONE MORE THING ABOUT INDEXED ANNUITIES AND THE SEC.........
The SEC has been trying to make the indexed annuity a security with law 151a.
WHY?
They say it is to regulate the selling of indexed annuities along with other reasons that would supposedly proetect the consumer, however, if you read the proposed bill it doesn't make any sense.
So WHY?
Let me ask you a question..........What has the SEC done to protect the investor from the fraud that has taken place with stocks, mutual funds, bonds, and variable annuities and the deceptive practices of brokers and Wall Street? Isn't that where the majority of people in this country have lost the most money, been scamed and lied to, and just plain ripped off???
So WHY?
Let me tell you why.......PROFIT SHARE!!!
INDEXED ANNUITIES HAVE TAKE A HUGE MARKET SHARE AWAY FROM WALL STREET AND FOR ALL OF YOU READING THIS THAT DON'T KNOW HOW THE FINANCIAL SERVICES INDUSTRY WORKS.........
THE SEC REGULATES FINRA
FINRA REGULATES THE BROKERAGE FIRMS
THE BROKERAGE FIRMS REGULATE THE BROKERS
AND THE BROKERS CAN ONLY SELL APPROVED PRODUCTS BY THEIR BROKERAGE FIRMS AND ALL "SECURITES" MUST BE SOLD THROUGH A BROKERAGE FIRM (BROKER DEALER)
AND THE BROKERAGE FIRM TAKES PART OF THE COMMISSION FROM THE SELL OF ALL SECURITIES!!!!!!!
EXAMPLE: BROKER SELLS JANUS MUTUAL FUND TO CLIENT........JANUS PAYS 5% COMMISSION TO THE BROKERAGE FIRM.......THE BROKERAGE FIRM THEN PAYS THE BROKER THIER CUT. IF THE BROKER WERE TO SELL AN INDEXED ANNUITY IT DOES NOT HAVE TO GO THROUGH THE BROKERAGE FIRM AND THE BROKERAGE FIRM WOULD NOT GET THEIR CUT OF THE COMMISSION........AND IF THEY FIND OUT THE BROKER HAS DONE THIS THEY CAN FIRE THE BROKER FOR "UNAPPROVED OUTSIDE BUSINESS ACTIVITY."
QUESTON............WHAT DO YOU THINK WILL HAPPEN OF THE SEC AND FINRA IS SUCCESSFUL IN CLASIFYING AN INDEXED ANNUITY AS A SECURITY??????????
ANSWER.............THEY THEN WILL BE ABLE TO SHARE IN THE PROFIT OF THE SALE OF EQUITY INDEXED ANNUITIES!!!!!!!!!!!!!!!!!!!!!!
Now do realize.......it is important for the client to be protected and the financil services professional who reccomends an equity indexed annuity to thier client AND should always be ethical and disclose surrender charges and how the product works, including explaing caps, participation rates, spreads, etce...........THAT IS OBVIOUS!!!!!!!!!!!!!!!!!!!!!!!!!!
But just because there are some financial services professionals who are not totally ethical who have sold equity indexed annuities AND SOLD THEM TO CLIENTS WHERE THE INVESTMENT WAS UNSUITABLE FOR THIER SITUATION, there are many more who are also unethical who have sold securities such as stocks, bonds, mutual funds, and variable annuities, however, that doesn't make the Equity Indexed Annuity a bad product by any stretch.
PREDICTION: IF THE SEC IS SUCCESSFUL WITH CLASSIFYING THE EQUITY INDEXED ANNUITY AS A SECURITY.........EVERY BROKERAGE FIRM AND EVERY BROKER WILL CHANGE THEIR TUNE AND PROMOTE THIS PRODUCT MORE THAN ANY OTHER IN THE HISTORY OF OUR INDUSTRY BECAUSE THEY CURRENTLY HAVE NOTHING THAT CAN GUARANTEE THIER CLIENTS SAFETY FROM MARKET DECLINES........THAT IS A LOT OF LIABLITY AND THEY WOULD LOVE TO HAVE THIS PRODUCT TO SELL AND SHARE IN THE PROFITS OF SELLING IT.
FACT: LAST WEEK, JULY 21ST THE THE U.S. COURT OF APPEALS, D.C. CIRCUIT OVER RULED 151a ruling and said that the SEC "failed to properly consider the effect of the rule upon efficiency, competition, and capital formation," AND HAS OVERTURNED THE ORIGINAL RULING OF 151a to make an equity indexed annuity a security.
Posted by: John G. Ziesing | Aug 5, 2009 9:15:13 AM
I came across a lady 70 years of age. Her CFP put her a REIT. all OF HER MONEY Now it is worth half and she cannot get her money out. This is what we as licensed insurance agents aspire to? Please save me from your lies CFPs.
Had she gotton into an Index Annuity she would have 10% access each year and if she needed more she could get it with a penalty on the amount above the first 10%. AND her account would NOT be worth ONE PENNY LESS unless SHE spent it.
There is NO perfect investment vehicle but the Index Annuity sure does a lot of what people have come to demand!
Posted by: clint.schink@netzero.com | Oct 5, 2009 11:33:08 AM
My 89 year old Grandmother lost 2/3 of her portfolio over the last couple of years. She went from the prospect of moving her legacy to the next generations to figuring out how to outlive her savings.
Don't tell me about unethical insurance men Mr. Stock Broker.
I now market fixed indexed annuities. I totally believe that they are the BEST way to save for retirement, and the BEST way to move money to the next generation, and the BEST way to never outlive your savings. That goes for ANYONE who can't afford to hire a team of EXPERTS to handle their money and ONLY their money.
I now consider Stock Market money the same as Gambling money... I might do it, but not as part of my retirement plan.
Clint Schink
Posted by: John | Nov 4, 2009 1:16:31 AM
I am working with a new financial advisor who is recommending that I roll my $250,000 401k into a a fixed index annuity. The product that the company he is representing has some key selling points; No caps and 90% liquidity after year one. From what I have read these are the two major concerns with this type of an investment vehicle. Are there others concerns? Also is there a list of reputable companies or those that I should look out for? Thanks!
Posted by: Anne Barton-Dempsey | Nov 8, 2009 9:26:41 AM
This Q& A forum has been most helpful! I consider myself a novice in the investment arena and the discussion of the pro's and con's of FIA investments is great.
I have a few questions that require a short synopsis of my retirement investment history:
I am 10 years from retirement and I have recently taken a 100,000K lump sum rollover to my bank IRA from my former employer's fixed benefit retirement account... because the company was bought out by another company (and new company trust levels are low). I have left that employer and have another defined retirement with my current employer. My husband has a defined benefit retirement plan and we have additional IRA investment monies in typical diversified mutual funds.
To get some perspectives on my overall retirement plan I have talked to 4 separate financial advisors from 4 firms and all advised me to take this 100,000K lump sum a rollover and offered to help me find the right investment vehicles. (I am 10 years from retirement). All except for one has been willing to sign me up with them immediately.
The advisor who wouldn't take my account immeidately says I should consider investing about 60-70% of my rolover in an FIA with and put 30-40% in other vehicles, which we will discuss next week together at our second meeeting.
He usually won't take new clients that do not have a minimum of 250,000K to start up. He seems credible and very knowledgable.
Question #1. Is this common or weird to have a figure of 250,000K for new clients?
He says his collegue CPA accountant could help me to set this FIA up and we have ameeting for this week scheduled to discuss this further.
Question #2. Is this legal? What license or certification is required for an handling an FIA account?
I do like the security and growth possibilities of the FIA and I thought it would give me a safe option to invest this money while maintaining more control than leaving in the defined benfit annuity offered by my former employer.
Question #3. What are typical FIA fees, costs and limitations that I should inquire about with any financial advisor?
Thanks,
Anne
Posted by: clint.schink@netzero.com | Nov 25, 2009 10:45:03 AM
Anne,
Your questions.
1. It is not so unusual to have a money manager to have a minimum to handle. 250k or 500k or even over 1 million are not unusual. (Those figures might just be there so you feel special though.)
2. A life insurance license is all that is necessary for selling FIAs.
3. Many FIAs have a sign on bonus that they pay to your account. Particularly if it is a longer term deal.
Some questions that you would want to ask are....
1. What are the portfolio options within the FIA. Most offer 4 or 5 options that you can mix and match or adjust annually.
2. If there is a sign on bonus, is it a real bonus or does it count only in the "pretend" side of the growth scenarios. The sign on bonus is often sold as the offset to the fee required if you need to access the money earlier than planned. Some will give you the bonus money if you need to withdraw, some won't.
3. Are there any upside caps, or maximum returns (and what are they).
4. What is the participation rate. (This is the rate that you participate in the upside of the strategy that you select. No upside cap with a 10% participation in the upside would still be low.)