If you are an adult with investments or nearing retirement, there is a 95% 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 store you are going to hear.
Let’s dissect the top 5 most common “buzz phrases” you are going to have to translate concerning FIAs, and the brutal facts 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 annual %’s have been the historical FIA returns.
“Free BONUS for just filling out the application” Factual Dissection: There are no philanthropists at annuity companies. No one is waking up wanting to give away money. Nothing in life is “free.” That applies to these bonuses as well. With 100 pennies in every dollar, FIA upfront bonuses are just part of the overall contractual guarantee picture.
“8% annual growth on your money” Factual Dissection: There are not geniuses at annuity companies that have figured out how to produce “Jimmy Carter Yield.” These high % numbers are used with Income Riders, and are monopoly money…but used by agents to have you believe otherwise. You can’t peel off the interest or cash in this high % amount. It is ONLY used to calculate the first income payment. Period.
“Free Long Term Care Coverage” or “Long Term Care Doubler” 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 LTC is a health insurance product, and still the best coverage. In a perfect world, these “confinement care’ riders should only be used as secondary coverage.
“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 crap. Please be smarter than that.
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.
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