Index annuity

[eltron]

Hi all. My dad is nearing retirement (next 3-4 months) and currently works for the state and has a pretty solid retirement plan (I'm assuming because he works for the state).

He spoke with his insurance agent who has turned him on to an 'index annuity'. According to this insurance agent it tracks with the S&P and when the S&P goes up, it goes up. When the S&P goes down it levels and you never lose ground. He also said it's insured by the government. The whole pitch sounds like bs to me.

I immediately told him this sounds like total insurance speak and you don't mix insurance with retirement. I've looked the board over and from what I've seen, this seems like the general consensus.

I told my dad I'd at least post his particular situation on here to see if I'm overlooking something. I told him typically when you can invest in something and it goes up and never goes down, that sounds like a too good to be true situation and if it was true, why isn't everyone doing it?

I was burned years ago by taking retirement advice from an insurance agent and I've had several years to recover from this - I'd like to avoid my dad having to go through the same situation since he's so close to retirement.

Am I overlooking something here? Are index annuities a great way for retirees to invest? I just can't imagine the answer is yes here.

My suggestion is to stick with the state plan and just move more into a defensive position (60% equities / 40% bonds) or something similar.

I'd appreciate any feedback on this.

[retired@50]

The whole pitch sounds like bs to me.
...
Am I overlooking something here?
...
Are index annuities a great way for retirees to invest?
...
I just can't imagine the answer is yes here.
My suggestion is to stick with the state plan and just move more into a defensive position (60% equities / 40% bonds) or something similar.
I'd appreciate any feedback on this.

Your first sentence shown above pretty much sums it up.

He'll pay a small fortune in fees to the salesperson. You're not overlooking anything. These products are to be avoided. These salespeople are professional confusers who try to turn the stock market into some sort of magic machine with no downside by limiting the upside and charging fees all the while.

You might want to look into the state plan details a little bit, just to make sure he's using low-expense ratio, broadly diversified funds.

Regards,

[Broken Man 1999]

How old is your father?

It seems as though you believe he has some state plan. Is it a pension, or some other kind of investment?

Some states are moving away from defined benefit pension plans to 401k plans. While the move is underway, sometimes there is a hybrid retirement plan.

Where would the funds to purchase the indexed annuity (DO NOT BUY) come from?

Knowing details about all his investments would be helpful, not too clear right now.

Broken Man 1999

[Stinky]

The whole pitch sounds like bs to me.
...
Am I overlooking something here?
...
Are index annuities a great way for retirees to invest?
...
I just can't imagine the answer is yes here.
My suggestion is to stick with the state plan and just move more into a defensive position (60% equities / 40% bonds) or something similar.
I'd appreciate any feedback on this.

Your first sentence shown above pretty much sums it up.

He'll pay a small fortune in fees to the salesperson. You're not overlooking anything. These products are to be avoided. These salespeople are professional confusers who try to turn the stock market into some sort of magic machine with no downside by limiting the upside and charging fees all the while.

You might want to look into the state plan details a little bit, just to make sure he's using low-expense ratio, broadly diversified funds.

Regards,

I couldn’t have said it any better than retired@50 did.

Just to clarify one thing, if your father were to talk to the salesman again, he would be told “there are no fees in this product”. And, in a very narrow sense, the salesman has some reason for saying that, because there are no “fees” that show up in the index annuity documents.

But what the salesman will be ignoring is the fact that the index annuity has significant charges (that is, “fees”) embedded inside the product. These fees total up to 2-3%, and they are hidden from the consumer. So, if the insurance company is earning 4%, they are passing only 1-2% on to your father, and keeping the rest.

OP, your instincts are correct. Encourage your father to not buy an index annuity. And encourage him to walk away from this advisor salesman.

[Helo80]

Hi all. My dad is nearing retirement (next 3-4 months) and currently works for the state and has a pretty solid retirement plan (I'm assuming because he works for the state).

He spoke with his insurance agent who has turned him on to an 'index annuity'. According to this insurance agent it tracks with the S&P and when the S&P goes up, it goes up. When the S&P goes down it levels and you never lose ground. He also said it's insured by the government. The whole pitch sounds like bs to me.

All the stock market gains but none of the losses? Everybody would be all over this.

You are right to ask questions.

This community would have whole Google spreadsheets dissecting every available Index Annuity product if it worked out to our advtange.

[Penguin]

Equity-indexed annuities are strongly not recommended for most investors. Interest paid by EIAs is not calculated with the usual formulas for calculating interest. EIA interest crediting methods are complex and have several moving parts. This makes it impossible to know at the time of purchase, how much interest, if any, you will get from the annuity. The surrender fees can have a significant impact. Please ask in the forum for advice.

https://www.bogleheads.org/wiki/Equity-indexed_annuity

[Nate79]

In general these products at best get a return like a low yield bond fund. Yet sadly they are SOLD (thanks to high fees and huge comission to the salesman) as getting stock like return with no risk.

Disgusting.

[DarkHelmetII]

Hi all. My dad is nearing retirement (next 3-4 months) and currently works for the state and has a pretty solid retirement plan (I'm assuming because he works for the state).

He spoke with his insurance agent who has turned him on to an 'index annuity'. According to this insurance agent it tracks with the S&P and when the S&P goes up, it goes up. When the S&P goes down it levels and you never lose ground. He also said it's insured by the government. The whole pitch sounds like bs to me.

I immediately told him this sounds like total insurance speak and you don't mix insurance with retirement. I've looked the board over and from what I've seen, this seems like the general consensus.

I told my dad I'd at least post his particular situation on here to see if I'm overlooking something. I told him typically when you can invest in something and it goes up and never goes down, that sounds like a too good to be true situation and if it was true, why isn't everyone doing it?

I was burned years ago by taking retirement advice from an insurance agent and I've had several years to recover from this - I'd like to avoid my dad having to go through the same situation since he's so close to retirement.

Am I overlooking something here? Are index annuities a great way for retirees to invest? I just can't imagine the answer is yes here.

My suggestion is to stick with the state plan and just move more into a defensive position (60% equities / 40% bonds) or something similar.

I'd appreciate any feedback on this.

1) crediting excludes dividends
2) significant timing risk - market could be on a brief dip on the day that the crediting calculation is made
3) expensive - there is a reason why companies like Ameritas don't even offer this product
4) only need an insurance license to sell, not more stringent credentials for selling equities
5) converts cap gains into ordinary income taxation

Consider something like 25% equities 75% intermediate term treasuries after you factor in all of the above a simple conservatively tilted 2 fund portfolio may generate similar returns without all of the insurance wrapper nonsense

[David Jay]

I'd appreciate any feedback on this.

If you can't get anywhere with your Dad on this, my last resort is to say that he is agreeing to the terms of the prospectus when he signs up, regardless of what the salesperson tells him. Even if the salesman is lying out his ***, the insurance company will respond to any complaint with "What does the prospectus say?". So he needs to read and understand the prospectus before he signs.

When he gets a copy of the huge (50+ page?) prospectus, you can go through it and show him (4) things:
1. He can lose money, typically the annuity guarantees an 85% to 90% return of capital
2. Show him the fees, typically about greater than 2% (this is why the annuity can lose money - if there is zero gain from the crediting formula, the fees still get deducted).
3. Go through the crediting formula and show him that he is getting credited with a tiny percentage of the SP price index (not total return).
4. Early withdrawal penalties

If he doesn't want to go through the prospectus, then I fall back on Jane Quinn Bryant's line" "Never invest in anything that you can't explain to a reasonably intelligent 12 year old".

[senex]

Please read this post by nisiprius, including the link to the FINRA alert about the nature of these products:

viewtopic.php?f=2&t=321164&p=5394258#p5394258

Annuities have other downsides besides the huge hidden fees. They also convert low-tax qualified dividends and long-term capital gains into high-tax ordinary income, and they don't get step-up basis at death.

I believe the general consensus is that most annuities are trash (except for one particular flavor of annuity, the SPIA, which is easy to mathematically evaluate).

[mickeyd]

Am I overlooking something here?

Nope, you are dead on! Is the insurance agent a fiduciary? Probably not. Buy Dad a new pair of Nikes so he can RUN AWAY!

Of course, if Dad is concerned that the insurance company will not compensate the insurance agent unless Dad "signs on the line which is dotted" and agent's family will not be able to pay bills, Dad can always donate a few thousand bucks directly to said agent as an act of charity.

[arcticpineapplecorp.]

two lies already mentioned:
1. you get the return of the market with none of the risk.
reality: you get a part of the return of the market...up to a cap/maximum amount.

this is important because some sleazy salesman will tell you the product can earn you 8%. That's only true if the market gains around 30%. Where'd the other 22% of that return go? The insurance company.

Some might say that's fine as long as my monthy payment doesn't fall along with the market. But you see over the long term, you'd make out much better just getting the overall return of the market. These products are attractive to people who can't handle the volatility of the market. But these folks don't realize what they're giving up going for "safety."

2. how do you, the salesman get paid? "oh, you don't pay me, the company does." how does that work? Since the company pays the salesman when s/he signs up somone for this policy, they then need to get that back. How? In addition to the fact you don't get the return of the market (see #1 above), there's a surrender fee which can last many years, 8 usually. While the fee goes down over time, you will pay if you get before then. You might say, well, I'll just wait until the surrender fee goes away in year 9. Well, by then, the company made that money off you, taking a large part of return that should have gone to you. Heads they win, tails you lose.

[Stinky]

Heads you win, tails you lose.

You meant “heads they win, tails you lose”?

[arcticpineapplecorp.]

Heads you win, tails you lose.

You meant “heads they win, tails you lose”?

sorry, yes. edited.

[Mr.BB]

Ask your dad how much of his current expenses are already covered by his pension and future social security earnings. If most of his expenses are already covered there is no reason to convert his future equity earnings.

[Rex66]

Performance of this product will eventually be the following regardless of what the agent says..,,

A little better or little worse than a fixed annuity.

Reason is 98% of the product is exactly the same.

What they do is take 98% and invest in bonds/treasuries and buy options with 2%. That’s why they can change caps and participation rates.

Zero chance of market type returns without market type risks.

[FiveK]

I've looked the board over and from what I've seen, this seems like the general consensus.

Sure is.

If you haven't already, reading the results of Bogleheads.org - Search for annuity in topic title should confirm that.

[Oicuryy]

Ask for a copy of the disclosure document.

What interest crediting method is the salesman recommending? Ask for the past history of that method; what annual interest rates did it actually pay? Ask for the history of changes to the rate cap/participation rate/spread.

This (probably outdated) page describes some interest crediting methods. Once you know the method you can download S&P 500 price index data, pick an anniversary date and back test with various parameters.
https://web.archive.org/web/20161205233 ... redit.aspx

Is the salesman pitching any optional extra cost living benefit riders? If so, compare the guaranteed withdrawals/payouts to the payouts from the estimator at https://immediateannuities.com.

Ron

[BeachPerson]

Index Annuity - only get 27% of S&P

Show the link by Fidelity!!! You do not get DIVIDENDS!!! That is 40% or more. In the Fidelity example, that is 46%. Then the participation rate knocks it down 20% more, and then there is cap and spread. An expense ratio too. The worst thing to do. Read the Fidelity article.

[DarkHelmetII]

Index Annuity - only get 27% of S&P

Show the link by Fidelity!!! You do not get DIVIDENDS!!! That is 40% or more. In the Fidelity example, that is 46%. Then the participation rate knocks it down 20% more, and then there is cap and spread. An expense ratio too. The worst thing to do. Read the Fidelity article.

Very interesting. Do many equity indexed products have not only a monthly cap but also an annual cap?

[bighatnohorse]

There's a very high level of negativity here.
I disagree with practically everyone - my experience with one variable indexed annuity has been outstanding.
(and second one not so wonderful)

Firstly, lets start with "government" insured pitch.
Each state has their own requirements for an annuity to be sold in that state.
The state operates a pooled insurance fund that guarantees the annuity up to a certain amount.
So that's your "government" insurance angle.
Make sure that you know the insured limit.

The "index" guarantee is real - how often and when does it "lock in"?
Many annuities allow you to invest in a limited amount of mutual funds that they open to you for choice.
Warning: if those funds suck, your index will never keep up with the market.

Being indexed to the "S & P" sounds attractive - and here's where it can get tricky. . .There's probably a guarantee percentage of either an "income base" or a "contract value" that you need to pay close attention to.
Get all their information and read and re-read it carefully to a point where you can teach it.

Another pitfall to watch for is if the promised interest is fixed or compound.

You'll get mostly negative information from this forum because there are TON of crappy insurance / annuity products that have been sold.
You'd have to sift through many hours of reading annuity prospectuses and maybe never find a good one.
If you don't have the time to examine the product your sales person has for sale then it's better to avoid it.
(You can PM me with the sales information as I am always looking for that diamond in the rough)

And here's one that is an example that you (an many others here) should read through - it's worth getting the printed version for study and notes.
https://www.aig.com/content/dam/aig/ame ... ochure.pdf

[SlowMovingInvestor]

The "index" guarantee is real - how often and when does it "lock in"?
Many annuities allow you to invest in a limited amount of mutual funds that they open to you for choice.
Warning: if those funds suck, your index will never keep up with the market.

I'm confused by this. You get a choice of indexes in a fixed index annuity, right ? You don't get a choice of mutual funds. The annuity may be implemented by the provider using options on those indexes, but that is all a black box to you.

[BeachPerson]

Index Annuity - only get 27% of S&P

Show the link by Fidelity!!! You do not get DIVIDENDS!!! That is 40% or more. In the Fidelity example, that is 46%. Then the participation rate knocks it down 20% more, and then there is cap and spread. An expense ratio too. The worst thing to do. Read the Fidelity article.

Very interesting. Do many equity indexed products have not only a monthly cap but also an annual cap?

Not sure. Mel Lindauer from this board wrote about them in Forbes: Mel's article

Take Mel's advice and run!!!

[FiveK]

...there are TON of crappy insurance / annuity products that have been sold.
You'd have to sift through many hours of reading annuity prospectuses and maybe never find a good one.
If you don't have the time to examine the product your sales person has for sale then it's better to avoid it.

No disagreement with that.

[mickeyd]

Index Annuity - only get 27% of S&P

Show the link by Fidelity!!! You do not get DIVIDENDS!!! That is 40% or more. In the Fidelity example, that is 46%. Then the participation rate knocks it down 20% more, and then there is cap and spread. An expense ratio too. The worst thing to do. Read the Fidelity article.

Very interesting. Do many equity indexed products have not only a monthly cap but also an annual cap?

Of course. That's how they make money off of the deal and pay the salesman.

[SlowMovingInvestor]

You'll get mostly negative information from this forum because there are TON of crappy insurance / annuity products that have been sold.
You'd have to sift through many hours of reading annuity prospectuses and maybe never find a good one.
If you don't have the time to examine the product your sales person has for sale then it's better to avoid it.

I consider myself to be pretty financially savvy, but I couldn't begin to tell whether a particular fixed index is a good product without a great deal of research and data on option pricing, interest rates, futures etc. And reading up complicated math. Fixed index annuities, as I understand them, are designed by experienced actuaries employed by the insurance company.

I might be lucky if some of their assumptions turned out to be incorrect, and I ended up getting a very good deal on the annuity, but I doubt it's something I could determine beforehand no matter how many hours I spent reading annuity prospectuses.

[SlowMovingInvestor]

Very interesting. Do many equity indexed products have not only a monthly cap but also an annual cap?

An annual cap might make more sense for the insurance company in that they only have to buy an option on the relevant index once a year, rather than rolling the option over every month ?

[music_man]

It is BS. Indexed annuity products are horrible investments. As others have pointed out, they are typically very costly, 3-7% commission up front, excessive fees during the life of the contract. In addition, you don't truly get market returns with these types of products. Typically, the insurance company doesn't count dividends when determining the return of the index. In addition, they'll typically cap the total credited return you would get. As an example, they might cap at 10%, so if the index goes up 15% in a given year, the return is capped at 10%. To add insult to injury, the actual credited amount one would get is based on a participation rate. If that rate were 100%, then your dad would get the full % return (again, excluding the dividends, and up to the cap). The reality, is the participation rate is not usually 100%. It might be 50% or 75%. If it's 50%, for example, he would only get half of the stated index return. Advise him to run far away. Terrible, terrible product.

[cheese_breath]

It is BS. Indexed annuity products are horrible investments. As others have pointed out, they are typically very costly, 3-7% commission up front, excessive fees during the life of the contract. In addition, you don't truly get market returns with these types of products. Typically, the insurance company doesn't count dividends when determining the return of the index. In addition, they'll typically cap the total credited return you would get. As an example, they might cap at 10%, so if the index goes up 15% in a given year, the return is capped at 10%. To add insult to injury, the actual credited amount one would get is based on a participation rate. If that rate were 100%, then your dad would get the full % return (again, excluding the dividends, and up to the cap). The reality, is the participation rate is not usually 100%. It might be 50% or 75%. If it's 50%, for example, he would only get half of the stated index return. Advise him to run far away. Terrible, terrible product.

And in many of them the insurance company might change the participation rate every year.

[Stinky]

There's a very high level of negativity here.

I disagree with practically everyone - my experience with one variable indexed annuity has been outstanding.
(and second one not so wonderful)

[snip]

And here's one that is an example that you (an many others here) should read through - it's worth getting the printed version for study and notes.
https://www.aig.com/content/dam/aig/ame ... ochure.pdf

The link is for a regular variable annuity - not an indexed annuity.

A variable annuity is an entirely different product than an indexed annuity - apples and oranges comparison.

Both products would not be recommended by the vast majority of Bogleheads - but for different reasons.

[Rex66]

Yep that is a variable annuity. Weird how he or she didn’t know that but discouraged the advice of others.
Completely different regarding the investment piece although it too should be discouraged but for different reasons.

[Mel Lindauer]

There's a very high level of negativity here.
I disagree with practically everyone - my experience with one variable indexed annuity has been outstanding.
(and second one not so wonderful)

Firstly, lets start with "government" insured pitch.
Each state has their own requirements for an annuity to be sold in that state.
The state operates a pooled insurance fund that guarantees the annuity up to a certain amount.
So that's your "government" insurance angle.
Make sure that you know the insured limit.

The "index" guarantee is real - how often and when does it "lock in"?
Many annuities allow you to invest in a limited amount of mutual funds that they open to you for choice.
Warning: if those funds suck, your index will never keep up with the market.

Being indexed to the "S & P" sounds attractive - and here's where it can get tricky. . .There's probably a guarantee percentage of either an "income base" or a "contract value" that you need to pay close attention to.
Get all their information and read and re-read it carefully to a point where you can teach it.

Another pitfall to watch for is if the promised interest is fixed or compound.

You'll get mostly negative information from this forum because there are TON of crappy insurance / annuity products that have been sold.
You'd have to sift through many hours of reading annuity prospectuses and maybe never find a good one.
If you don't have the time to examine the product your sales person has for sale then it's better to avoid it.
(You can PM me with the sales information as I am always looking for that diamond in the rough)

And here's one that is an example that you (an many others here) should read through - it's worth getting the printed version for study and notes.
https://www.aig.com/content/dam/aig/ame ... ochure.pdf

Lots of misinformation here.

First, it's illegal for any insurance salesman to claim government protection for annuity products as part of their sales pitch.

Secondly, as has already been pointed out, this person apparently doesn't understand the difference between an Indexed Annuity and a Variable Annuity.

Third, the reason for the overwhelming negativity on this forum is simple; it's the truth. (The wisdom of crowds.)

Finally, an Indexed Annuity is probably the worst of the worst insurance products IMO. I did a Forbes column some time ago, warning investors about these horrible products titled "The Truth about Indexed Annuities". Here's a link:
https://www.forbes.com/2010/08/10/truth ... abc3611257

As others have suggested, run, don't walk.

[bighatnohorse]

Lots of misinformation here.

First, it's illegal for any insurance salesman to claim government protection for annuity products as part of their sales pitch.

Secondly, as has already been pointed out, this person apparently doesn't understand the difference between an Indexed Annuity and a Variable Annuity.

Third, the reason for the overwhelming negativity on this forum is simple; it's the truth.

Finally, an Indexed Annuity is probably the worst of the worst insurance products IMO. I did a Forbes column some time ago, warning investors about these horrible products titled "The Truth about Indexed Annuities". Here's a link:
https://www.forbes.com/2010/08/10/truth ... abc3611257

As others have suggested, run, don't walk.

I suspect the only misinformation is in the Original Poster's understanding and communicating what he/she comprehends.
Firstly, if it's indexed to the S & P it can't be fixed, can it?
And by "government" he/she probably didn't get that right either.

If that's the case, then yes, he/she should run away - since they don't understand the product - and don't communicate it.

And your "article" is more than ten years old. Like you're staying current and reading through all the possible annuity products? Or just trying to get published like all the other financial writers?
I've noticed that not one other posted made any type of inquiry . . .

[Rex66]

They are considered fixed bc typically there is a small guarantee like zero or 1% gain. This gives it the insurance “definition” of fixed. Again everything is smoke and mirrors with the truth being the insurance company invests almost all of the money in bonds and treasuries and invests a small percent in options. Return will be that strategy minus costs/fees/commissions.

[bighatnohorse]

They are considered fixed bc typically there is a small guarantee like zero or 1% gain. This gives it the insurance “definition” of fixed. Again everything is smoke and mirrors with the truth being the insurance company invests almost all of the money in bonds and treasuries and invests a small percent in options. Return will be that strategy minus costs/fees/commissions.

Partially true.
"Smoke and mirrors" phrase is a cop out to not understanding the details - which you can't without looking at the product.
Do you propose to give advice without the particulars and based on generalities - like the previous link to an article 10 years old?

[Rex66]

All of the index annuities have the same underlying chassis currently. Maybe some day regulators And the insurance industry will allow a more aggressive approach but not currently. So I can read it (I’ve done this many times). It by the way does not tell you the underlying mechanics I alluded to. You would have to research that separately. It’s why it doesn’t matter that much what the product says beyond the guarantee which again is a zero or 1-2% floor currently.

[000]

Post the prospectus/contract or all you're going to get is speculation.

[reln]

Hi all. My dad is nearing retirement (next 3-4 months) and currently works for the state and has a pretty solid retirement plan (I'm assuming because he works for the state).

He spoke with his insurance agent who has turned him on to an 'index annuity'. According to this insurance agent it tracks with the S&P and when the S&P goes up, it goes up. When the S&P goes down it levels and you never lose ground. He also said it's insured by the government. The whole pitch sounds like bs to me.

I immediately told him this sounds like total insurance speak and you don't mix insurance with retirement. I've looked the board over and from what I've seen, this seems like the general consensus.

I told my dad I'd at least post his particular situation on here to see if I'm overlooking something. I told him typically when you can invest in something and it goes up and never goes down, that sounds like a too good to be true situation and if it was true, why isn't everyone doing it?

I was burned years ago by taking retirement advice from an insurance agent and I've had several years to recover from this - I'd like to avoid my dad having to go through the same situation since he's so close to retirement.

Am I overlooking something here? Are index annuities a great way for retirees to invest? I just can't imagine the answer is yes here.

My suggestion is to stick with the state plan and just move more into a defensive position (60% equities / 40% bonds) or something similar.

I'd appreciate any feedback on this.

Index annuities are better than bonds in a diversified portfolio.
1. higher expected return than bonds bc the cap rate is set by the interest rate market (this determines the insurers options budget), so the magnitude of index annuity returns track the bond market
2. different correlations to stocks and bonds
...2a. to stocks bc the return is 0 when stocks are down, and up when stocks are up... It's not free, you pay with a cap on annual returns and excludes dividends if on a price index and includes dividends if on a total return index.
...2b. to bonds bc the direction (up or flat) is based on stocks

I don't hold index annuities nor do I hold bonds.

I would recommend SPIA instead of bonds. But index annuities are also better than bonds and are "insured" from losses.

For everyone other than the OP: I won't reply too/nor finish reading insults for expressing differing opinions.

[Rex66]

They will perform slightly better or slightly worse than bonds. They are also very correlated with interest rates and bonds bc that’s a big part of the insurance company’s investment. All products have shown decreasing caps and participation rates bc of this and bc costs of options has increased for them. You will also notice the caps/participation rates are higher with index life insurance. This is bc they can “get you” on the insurance costs factors which they can’t with annuities.

[cheese_breath]

But index annuities are also better than bonds and are "insured" from losses.

It's good that you put "insured" in quotes, because they aren't guaranteed to return all the premiums you paid in. From the FINRA warning referenced earlier...

When EIAs were first sold in the mid-1990s, the guaranteed minimum return was typically 90 percent of the premium paid at a 3 percent annual interest rate. More recently, in part because of changes to state insurance laws, the guaranteed minimum return is typically at least 87.5 percent of the premium paid at 1 to 3 percent interest. However, if you surrender your EIA early, you may have to pay a significant surrender charge and a 10 percent tax penalty that will reduce or eliminate any return.

[Nate79]

I'm wondering if a wolf in sheep clothing, aka an insurance salesman has shown up in this thread? Wouldn't be the first time they come on here trying to defend these atrocious products.

[bighatnohorse]

Firstly, the original poster should post a link to the prospectus before drinking the local coolaid.
So far, it's just been a lot of hot air without any knowledge of the exact product being questioned.

[Stinky]

Firstly, the original poster should post a link to the prospectus before drinking the local coolaid.
So far, it's just been a lot of hot air without any knowledge of the exact product being questioned.

It should be noted that not all indexed annuities have a prospectus.

If OP would post a company and product name, that would probably lead to enough information to have a fact-based discussion.

[reln]

But index annuities are also better than bonds and are "insured" from losses.

It's good that you put "insured" in quotes, because they aren't guaranteed to return all the premiums you paid in. From the FINRA warning referenced earlier...

When EIAs were first sold in the mid-1990s, the guaranteed minimum return was typically 90 percent of the premium paid at a 3 percent annual interest rate. More recently, in part because of changes to state insurance laws, the guaranteed minimum return is typically at least 87.5 percent of the premium paid at 1 to 3 percent interest. However, if you surrender your EIA early, you may have to pay a significant surrender charge and a 10 percent tax penalty that will reduce or eliminate any return.

There is a surrender charge on most. Those without a charge will also probably have a lower cap.

All this does is limit liquidity as you generally get access to 10% of the greater of balance and premium annually without surrender charge.

NY rules are different from non NY.
In non NY, you get the larger of 87.5% of premium accumulated at the nonforfeiture rate and the accumulation value less surrender charges (if applicable).
In NY you get the greater of 100% of premium accumulated at the greater of the nonforfeiture rate or equity index return (reset up decennially) less a NYS-limited surrender charge (if applicable) and the accumulation value less surrender charge (if applicable).

In today's low interest rates, you might be better off with a CD or a fixed deferred annuity than an index annuity. All these options are better than holding AGG bond. Nothing is better than holding stocks.

[Taylor Larimore]

Eltron:

Your Dad is fortunate to have you for investment advice.

Copy this Forbes article by Boglehead Mel Lindauer and give it to your Dad.

https://www.forbes.com/2010/08/10/truth ... 0ce4021257

I was licenced to sell annuities. I never sold an index annuity because I think they are horrible investments.

Best wishes.
Taylor

Jack Bogle's Words of Wisdom: "I'm not particularly smitten with most index-linked annuities."

[capjak]

Index Annuity is an alternative to a CD or Bond. They are designed to compete with CD like returns, with the possibility of getting a higher return if things work out over the life of the annuity. Expect slightly better than CD returns no more no less.

[Rex66]

The part about what is guaranteed for losses.. this would be in the contract and actually is all of principal minus surrender charges in most cases. Now you have to also understand what guarantee means. It means IF the company has the claims capability. They almost always do which again is why they have the underlying investment scheme which is mandated to a certain degree. The state guaranty association doesn’t technically back these products/companies but up to state limits try to make you whole. It should be noted that when an insurance company gets in to trouble the association has not always made people whole. They have at least 94% of the time for annuities last time I reviewed this. Again that’s only for companies that are in essence going under. You have much much lower historically of not getting the guarantee. I’m not aware of any index products/companies failing to meet the minimum and people not being made whole but they are relatively newer. In the countrywide debacle I think some people didn’t get their money for years though although technically that was considered making them whole. If you look at the Japan example, if interest rates remained low indefinitely, there would be problems but this wouldn’t just be index products. Funny enough the only products that wouldn’t be in trouble would be variable not talking about any secondary guarantees on the product, just the primary investment.


The kookaid is coming from people who don’t know what an index annuity is but confuse it with a variable annuity.

[ruralavalon]

Hi all. My dad is nearing retirement (next 3-4 months) and currently works for the state and has a pretty solid retirement plan (I'm assuming because he works for the state).

He spoke with his insurance agent who has turned him on to an 'index annuity'. According to this insurance agent it tracks with the S&P and when the S&P goes up, it goes up. When the S&P goes down it levels and you never lose ground. He also said it's insured by the government. The whole pitch sounds like bs to me.

I immediately told him this sounds like total insurance speak and you don't mix insurance with retirement. I've looked the board over and from what I've seen, this seems like the general consensus.

I told my dad I'd at least post his particular situation on here to see if I'm overlooking something. I told him typically when you can invest in something and it goes up and never goes down, that sounds like a too good to be true situation and if it was true, why isn't everyone doing it?

I was burned years ago by taking retirement advice from an insurance agent and I've had several years to recover from this - I'd like to avoid my dad having to go through the same situation since he's so close to retirement.

Am I overlooking something here? Are index annuities a great way for retirees to invest? I just can't imagine the answer is yes here.

My suggestion is to stick with the state plan and just move more into a defensive position (60% equities / 40% bonds) or something similar.

I'd appreciate any feedback on this.

Index annuities (aka equity indexed annuities) are not a good investment choice.

FINRA pdf, "Investor Alert" on Equity-Indexed Annuities.

SEC (7/31/2020), "Updated Investor Bulletin: Indexed Annuities"

[theresearcher]

The going rate for risk-free investments- as set by a market comprising many of the smartest financial minds in the country- is around 0.2% annually for 3 years and 0.7% annually for 10 years. That's what you need to accept if you don't want any risk of losing money.
https://www.treasury.gov/resource-cente ... data=yield

If there were to be a product in existence that gives access to the full upside of the S&P without any of the downside, why would all these smart people be prepared to take less than 1% annually from the U.S. Treasury rather than this hypothetical guaranteed S&P return product.

It is possible for an investor to buy an S&P 500 linked product and purchase an option to sell at the current price at a future date. This protects against downside risk, but at a cost. Example the current price of the State Street SPY ETF- which tracks the S&P 500- is around $337 and a December 2022 option to sell at the same price is around $48 (these numbers change all the time). In other words, using a $10,000 investment someone can purchase either 30 shares of SPY or 26 shares of SPY itself plus 26 put options to sell these SPY shares at the same price at the end of 2022. That protects you against the S&P falling in value in that time period (because you exercise the put options to recover the value of 26 shares) however the downside is that if the S&P stays the same your options are worthless at the end of 2022, you're left with only 26 shares rather than 30 you could have bought and your investment is down to $8,760. If you'd bought U.S. treasuries you'd have around $10,500.

[BeachPerson]

Do the Indexed Annuities also have expense ratios? The Vanguard S&P 500 index is three or so basis points. Would the insurance company charge 50 or 100 basis points?