Indexed Annuities: Too Good to Be True?


If you are considering purchasing an indexed annuity, please read the following article carefully. And remember, if it sounds too good to be true, it probably is.

FINRA (Financial Industry Regulatory Authority) has issued an Investor Alert on Equity-Indexed Annuities.

Here are five important things you need to know about indexed annuities:

It’s Insurance.

An indexed annuity is an insurance product. Before even considering purchasing one as an alternative retirement investment, research the details thoroughly and make sure you understand the risks, fees, how returns are calculated, and when and how you can make withdrawals and what they will cost you.

Low Yield.

These products are often advertised as having zero downside risk, but with the ability to capture the upswings of the stock market. Be aware there are several ways your upside returns can be reduced. For instance, if the market goes up, the annuity will often not pay that same rate of increase as there will be a limitation of the increase in the form of a performance cap. This cap is set by the insurance company and can be changed according to their policies, and you have no recourse when this happens. Any performance increase above the cap is not paid to the annuity, but rather kept to profit the company. There are also participation rates and spreads that can reduce the yield.

A Fidelity Investments report shows that over the 10 years ending December 31, 2018, the S&P 500 average annual return was 13.12%. The representative indexed annuity illustrated in the report, using a monthly cap of 1.50% and monthly point-to-point crediting method, returned only 3.53% annually, despite a guaranteed annual floor of 0%, and despite an 8% bonus that may be offered. As a comparison, during that same 10-year period, the MBA Income Fund averaged 4.65%.*

Increased Fees and Commissions.

While it is true that most indexed annuities have no up-front sales charges, they often are upsold with additional riders. For example, several insurance companies will offer a guaranteed living withdrawal benefit at an average annual cost of nearly 1% of the account value. In addition, if you change your mind or find a better-suited investment opportunity during your long surrender period, you can be hit with severe penalties and possibly even lose principal. Indexed annuities can charge more than 9% in a surrender penalty if you move out of the contract within a certain number of years.

Keep in mind that high commission rates of up to 10% may influence insurance agents to act in their own self-interests, rather than considering what’s best for their prospective client.

Having been in the insurance industry for over 30 years, I am very familiar with indexed annuities. They are complex and while most individuals do not understand them, even some agents don’t understand them except that they pay a higher commission, incentivizing them to offer them. Also, you need to look at the insurance company’s ratings, and don’t even think about considering a company that doesn’t have the highest ratings.

Jerry Sparks, President
AGFinancial Insurance

Difficult to Understand.

The typical annuity contract can be hard to read and understand. It should clearly state what the performance of the annuity is correlated to, such as the performance of the S&P 500. In addition, the contract should be written such that the expected yield, surrender charges, and other fees are easily found and understood.

Aggressive selling.

Do not allow yourself to be pressured. Insurance agents may use various tactics to encourage the purchase of an indexed annuity, such as targeting seniors or promising features that may or may not be accurate. For example, if an agent says that ministers housing allowance is available for the annuity, be sure to ask questions to ensure you don’t forfeit this valuable benefit. How much experience and knowledge does the agent have with the complex nature of ministers housing allowance? Have you researched the organization that is acting as the authority to establish the housing allowance? Make sure to protect your hard-earned money by obtaining appropriate written documentation confirming the inclusion of the ministers housing allowance with any product you purchase.

In addition to our own concerns about annuities, other familiar sources fly similar warning flags:

AARP - Dream Investment or Potential Nightmare?

Forbes - Do Not Invest in an Equity-Indexed Annuity

Fidelity - Indexed annuities: Look before you leap

If after your thorough research you are still thinking about buying an indexed annuity, be sure to first seek professional advice from a qualified and experienced professional. You’ve worked hard to save for retirement and other goals, and chasing returns through complicated investments could be detrimental to your financial future. Contact us if you would like to discuss the retirement investment options we have available.

* This is not an offer to sell or a solicitation to buy any securities. Before investing you should carefully consider investment objectives, risks, charges, and expenses of an investment in the AGFinancial Retirement Plan and the underlying funds. Underlying fund expenses and other information are contained in the prospectus of the underlying funds, which can be obtained by calling 800-622-7526. Plan expenses and other information can be obtained by contacting AGFinancial, LLC. Performance information is historical and does not guarantee future results.

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