Fixed Indexed Annuities

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Paisley
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Fixed Indexed Annuities

Post by Paisley » Tue Apr 16, 2019 12:48 pm

There is a person I know who sells fixed indexed annuities. His claim is that the product guarantees that clients benefit from the growth potential of the stock market without any of downside the risk. This honestly sounds too good to be true! When I asked about how this is possible and for him to explain the product features, all I was told was that the insurance companies are sharp folks and they have figured out a win win for them and for me. The guy is putting the hard sell on me and he's confident and wants me to trust him but something in my gut tells me something is wrong.
Can anyone out there help me? Can this product honestly guarantee the same returns as the stock market if it goes up but never lose me money if the market falls? What is this guy not telling me that I need to know?

magicrat
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Re: Fixed Indexed Annuities

Post by magicrat » Tue Apr 16, 2019 1:01 pm

The only guarantee is that the "advisor" will make a hefty commission that will come directly out of your pocket.

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Re: Fixed Indexed Annuities

Post by livesoft » Tue Apr 16, 2019 1:14 pm

Actually, "... the product guarantees that clients benefit from the growth potential of the stock market without any of downside the risk." would be true if it was restated as

"... the product guarantees that clients benefit from the a very small fraction of the growth potential of the stock market without any of downside the risk."

The company and the salesrep take a big chunk of your money along with a big chunk of any growth potential that actually shows up.

Note that CDs, a savings account, a money market fund, and many other investments also provide a positive return without any downside risk.
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prudent
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Re: Fixed Indexed Annuities

Post by prudent » Tue Apr 16, 2019 1:14 pm

I suspect it's because the details of "market goes up" means not including dividends and a cap (or maybe a "participation rate" or "spread") on how much you can get each year from market growth. So "market growth" doesn't count let's say 2% each year in dividends that you would get if you were invested in index funds, and if the market goes up 15%, 20%, 25% they credit you with perhaps 8%. And you might have to pay a surrender charge to get out depending on how long you hold it. These are extraordinarily complex products. The glossy brochure seems easy enough to understand with its bar charts and smiling happy people, but the actual contract is probably 80 pages of indecipherable language.

I'll bet the guy never said you'd get the "same returns" as the market. But they don't mind if you think that's what was said.

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Re: Fixed Indexed Annuities

Post by David Jay » Tue Apr 16, 2019 1:16 pm

He is lying when he says that you will get “stock-market like returns”, you will get no such thing.

Here Is the list of issues for the annuity salesman:
1. What index does the annuity track? (Typically the SP500 Price index, not the SP500 Total Return, this costs you nearly 2% per year in dividends)
2. Please show and explain to me, from the prospectus, the actual crediting formula, including all caps and limitations (there is always a formula such that you don’t even get 100% of the SP500 price index)
3. Please show me, from the prospectus, the withdrawal penalty schedule if I want to withdraw my money early. (Usually 7-10 years of penalty)
4. Please show me, from the prospectus, all other fees and charges.
5. How much do you make the day I hand my money over to you? (typically 6-8% of your purchase amount)
Last edited by David Jay on Wed Apr 17, 2019 6:44 pm, edited 3 times in total.
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Nate79
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Re: Fixed Indexed Annuities

Post by Nate79 » Tue Apr 16, 2019 1:18 pm

The language that I want to use to describe these products would get me permanently banned from this site. Use your imagination.

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David Jay
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Re: Fixed Indexed Annuities

Post by David Jay » Tue Apr 16, 2019 1:19 pm

Nate79 wrote:
Tue Apr 16, 2019 1:18 pm
The language that I want to use to describe these products would get me permanently banned from this site. Use your imagination.
...start with Male Bovine Excrement.
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BL
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Re: Fixed Indexed Annuities

Post by BL » Tue Apr 16, 2019 2:11 pm

Here is a link to FINRA, a watchdog for some of this stuff:
http://www.finra.org/investors/indexed-annuities

You won't win any argument with this person. Don't even try. Good job checking now before it is too late and a costly mistake.

I believe the Whitecoat Investor may have something on the subject. Also search Bogleheads.

There are some lower cost annuities by Vanguard annuities, I believe. Still not a good deal. If a salesperson is involved you would pay his commission directly as a surrender cost if you surrender early. It is too complicated for anyone to understand, and too costly.

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Re: Fixed Indexed Annuities

Post by Mr.BB » Tue Apr 16, 2019 2:32 pm

Paisley wrote:
Tue Apr 16, 2019 12:48 pm
There is a person I know who sells fixed indexed annuities. His claim is that the product guarantees that clients benefit from the growth potential of the stock market without any of downside the risk. This honestly sounds too good to be true! When I asked about how this is possible and for him to explain the product features, all I was told was that the insurance companies are sharp folks and they have figured out a win win for them and for me. The guy is putting the hard sell on me and he's confident and wants me to trust him but something in my gut tells me something is wrong.
Can anyone out there help me? Can this product honestly guarantee the same returns as the stock market if it goes up but never lose me money if the market falls? What is this guy not telling me that I need to know?
I can help you very easily. If a person cannot explain how or why something is good for you. saying "insurance companies are sharp folks and they figured out how the win for everyone" is a bunch of BS and is insulting to one's intelligence.
Go back to the person and tell me you're really insulted by his lack of details and information about the products along with the lack of information about the fees. If he he can give you a list of all the fees related to the product you might listen a little closer.
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Re: Fixed Indexed Annuities

Post by cheese_breath » Tue Apr 16, 2019 2:33 pm

livesoft wrote:
Tue Apr 16, 2019 1:14 pm
...
...Note that CDs... also provide a positive return without any downside risk.
And it costs a lot less to cash in your CD early.
The surest way to know the future is when it becomes the past.

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Paisley
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Re: Fixed Indexed Annuities

Post by Paisley » Tue Apr 16, 2019 3:00 pm

WOW
Thank you so much everyone!!!

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Stinky
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Re: Fixed Indexed Annuities

Post by Stinky » Tue Apr 16, 2019 3:52 pm

Former insurance company person here. I've seen this product from the inside.

Trust me, there's no free lunch. The insurer will pay you only a small fraction of the stock market gains. You will also not get the benefit of the dividends on the stock market, which are +-2% per year. While you won't lose money, you won't make anywhere near what the stock market returns. And you'll not be able to get your money out without a significant "surrender charge" for likely a decade or more.

The true winner here is your "friend", the advisor. He'll make a lot of money selling you the annuity. Maybe 5-8% of the amount you invest. Of course he'll over-promise in order to get you to buy it.

In short, don't buy an FIA. Ever. Glad that you asked this Board before you plunged in.
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Re: Fixed Indexed Annuities

Post by nisiprius » Tue Apr 16, 2019 4:16 pm

These used to be called "equity-indexed annuities." They got a very bad name. The product itself is bad enough. There's a book, The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly, Larry Swedroe and Jared Kizer, and the table of contents tells you everything you need to know:

Image

But, worse yet, they were aggressively oversold with a variety of misleading statements--as seems to be occurring now. The FINRA alert is one symptom.

So, what did they insurance industry do, as the word started to get around?

They changed the name of the product. "Equity indexed annuities" are bad. "Fixed annuities" can be good. Many people have read favorable things about "fixed annuities."

So they started to call them "fixed indexed annuities."

And that, too, tells you something.

Finally, just one of details from the FINRA alert, which you should read through carefully:
Is It Possible to Lose Money In an EIA?

Yes. Many insurance companies only guarantee that you’ll receive 87.5 percent of the premiums you paid, plus 1 to 3 percent interest. Therefore, if you don’t receive any index-linked interest, you could lose money on your investment. One way that you could not receive any index-linked interest is if the index linked to your annuity declines. The other way you may not receive any index-linked interest is if you surrender your EIA before maturity. Some insurance companies will not credit you with index-linked interest when you surrender your annuity early.
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Re: Fixed Indexed Annuities

Post by nisiprius » Tue Apr 16, 2019 4:20 pm

I suggest not arguing with this "person you know." Simply engaging with him on the topic gives him a chance to do all the things salespeople are best at. They can talk you into a situation that amounts to agreeing that you must buy the product unless you can convince him that it is bad!

Don't be disagreeable (unless you want to be). I suggest being courteous and friendly, and sticking to variations of two responses:

1) "No."

2) "[Thank you very much for your time etc. but] I have made my decision."

Don't explain your decision, don't defend it, don't mention Bogleheads or the Swedroe and Kizer book or the FINRA alert, just keep answering everything with "I have made my decision."

I've heard that some salespeople are literally trained to count "Noes" and not give up until they've heard seven. I don't know if that's true. Beginning every sentence with the word "no" definitely helps. Once I was able to bring myself to say "No, no, no, no, no, no, no," and the salesperson said something polite, said goodbye, and ended the phone call himself.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Fixed Indexed Annuities

Post by socaldude » Tue Apr 16, 2019 4:33 pm

A neighbor bought one of these miracle products, didn't read the fine print, when the market goes down he doesn't lose ( zero percent) when the market goes up (i.e. 1 year 15% ) he makes only 1.5%. He is not a happy camper, buyer beware and read the fine print !!

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Re: Fixed Indexed Annuities

Post by Mel Lindauer » Tue Apr 16, 2019 5:32 pm

As has been pointed out, Equity Indexed Annuities got such a lousy reputation that the insurance industry changed the name to make it sound better.

Here's a link to a Forbes column I wrote some time ago when they were still called Equity Indexed Annuities. While the name has been changed, the product hasn't, so heed my (and everyone else's) warning and realize that your "friend" isn't really your friend if he's trying to sell you one of these awful products.

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Re: Fixed Indexed Annuities

Post by FIREchief » Tue Apr 16, 2019 5:38 pm

livesoft wrote:
Tue Apr 16, 2019 1:14 pm
The company and the salesrep take a big chunk of your money along with a big chunk of any growth potential that actually shows up.
Don't forget the fact that you also just bought about a dozen expensive steak dinners for the plate lickers at the sales pitch! :beer
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Re: Fixed Indexed Annuities

Post by dia » Tue Apr 16, 2019 5:49 pm

Don't do it. Simple as that. I just stopped paying on the rider for my 10 year fixed index annuity. It is SOOOOO confusing with regard to what you actually get. I decided not to annuitize it so I am not paying the rider anymore (after 4 years) which has been taking 1% every year. As soon as I hit year 10 (in year 5 right now), I am moving the $$$ back into a tIRA where it belongs, so basically I am treating it as a big CD with a non-impressive interest rate. (I get between 1% and 2.9%)

HUGE mistake--don't buy something that sounds too good to be true. These advisors should NOT be allowed to sell them, I don't think even they can understand all the complexity that goes into formulating these monsters. All I kept hearing was 7% rate and I was sold, but it's not 7% like you and I would think 7%. I could go on and on--I learned a great deal from this debacle. Good Luck. Run.
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Re: Fixed Indexed Annuities

Post by nisiprius » Tue Apr 16, 2019 7:02 pm

dia wrote:
Tue Apr 16, 2019 5:49 pm
...I don't think even they can understand all the complexity that goes into formulating these monsters...
FINRA, the Financial Industry Regulatory Authority made these points about complexity in their alert:
Equity-Indexed Annuities: A Complex Choice

Sales of equity-indexed annuities (EIAs)—also known as "fixed-indexed insurance products" and "indexed annuities"—have grown considerably in recent years. Although one insurance company at one time included the word "simple" in the name of its product, EIAs are anything but easy to understand. One of the most confusing features of an EIA is the method used to calculate the gain in the index to which the annuity is linked. To make matters worse, there is not one, but several different indexing methods. Because of the variety and complexity of the methods used to credit interest, investors will find it difficult to compare one EIA to another....

EIAs are complex financial instruments that have characteristics of both fixed and variable annuities....
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Re: Fixed Indexed Annuities

Post by FBN2014 » Tue Apr 16, 2019 7:32 pm

The agent will dazzle you with illustrations of complex, mysterious indexing strategies that will amaze you with the projected returns. None of these illustrations are guaranteed returns in fact it says right on the illustration in one of the columns "non-guaranteed". These annuities historically have returned 4-5% and tie up your money for 7-12 years. If the agent pushes a guaranteed income rider which gives you income that you can't outlive, the insurance company charges you 1-1.25% for the rider. Bad, bad deal if you do the math over a 20-30 year time frame in retirement. The only annuity that you should ever consider is a Single Premium Immediate Annuity (SPIA) and only for a portion of your portfolio.
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Re: Fixed Indexed Annuities

Post by Oicuryy » Tue Apr 16, 2019 7:44 pm

Paisley wrote:
Tue Apr 16, 2019 12:48 pm
Can this product honestly guarantee the same returns as the stock market if it goes up but never lose me money if the market falls?
No it can't.

Fixed annuities accrue interest that is paid at maturity. Fixed indexed annuities calculate interest using a formula that includes some values from a market index.

This page lists some of the simpler interest crediting methods.
https://web.archive.org/web/20161205233 ... redit.aspx
Click on the formulas link on that page to see the details.

The parameters rate cap, participation rate and spread are values the insurance company sets to limit the amount of interest they pay. Typically they can change these values once a year. So be leery if the first year's parameters seem generous.

At maturity you will likely get about as much as you would have gotten from CDs over the same time period. Maybe more, maybe less depending on the random ups and downs of the index.

At maturity you are guaranteed to get back at least what you paid in. If you withdraw money before maturity you will pay a surrender charge. So you could get back less than you paid in.

Some indexed annuities offer optional guarantees for additional fees.

Insurance companies publish a disclosure document that describes the details of the product in lawyer-approved language. When you sign the contract you will be agreeing that you have received, read and understood the disclosure document.

Ask your friend for a copy of the disclosure document. After that, when he makes his pitch you can say, "Well, maybe, but I'm still waiting for the disclosure document." If he actually gives you the document you can say, "No thanks. All that stuff in there about rate caps makes it clear I won't get the stock market's return."

But if you are lucky and like to gamble there is a chance you could make more than you would from CDs.

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Re: Fixed Indexed Annuities

Post by Random Musings » Tue Apr 16, 2019 9:02 pm

In almost all cases, run, don't walk away from variable annuities.

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Paisley
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Re: Fixed Indexed Annuities

Post by Paisley » Wed Apr 17, 2019 7:28 am

Thank you everyone!

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