Understand the Pros and Cons of Fixed Index Annuities

pros and cons of fixed index annuities

In retirement, how much money you have is not nearly as important as how much money you have to spend. So the biggest challenge when weighing the pros and cons of fixed index annuities in retirement planning is determining if the annuity you are considering will create guaranteed income that is there when you need it.

But when it comes to guaranteed income, all too often, retirees are only shown just a few options, like complicated ‘hybrid’ lifetime income annuities.

It’s a shame, but people mistakenly think they must settle for these low income payout, long term contracts that offer little or no growth of their money. When it comes to pros and cons, too often, the ‘cons’ outweigh the ‘pros’ with these types of contracts.

You CAN Do Better!

Don’t let a few bad apples spoil the barrel- the reality is, there ARE better options out there that can secure your money and create a guaranteed income without locking yourself in to a ‘forever contract’ that you may come to regret.

In fact, savvy customers often find the guaranteed safety they need, but do so by staying OUT of guaranteed income contracts entirely!

With a focus on a safe and flexible guaranteed outcome planning, these smart consumers around the country have discovered the “Flex Strategy” and are using Fixed Index Annuities that guarantee the retirement they dream of, to mitigate risk and produce income options years into the future.

Click here to learn more about this smart, flexible annuity strategy. Or, read on for more on how a solid understanding of the pros and cons of Fixed Index Annuities, where we reveal how you can take the best these exciting products have to offer, and ditch the bloated bells and whistles, to create a compelling and flexible guaranteed retirement strategy.

PROS AND CONS OF FIXED INDEX ANNUITIES: Pros

Principle and Growth Guarantee- Your initial investment is safe from loss, and guaranteed to grow.  The contract will state the minimum amount you can expect to receive at the end of the surrender period.

Tax Deferral- Like all annuities, your money grows on a tax-deferred basis.

Account Step Ups- In most cases, a new base contract value can be locked in when the index performs well.  This gives you the benefit of locking in a new guaranteed basis when the market works the way we all want it to.

Cons

Low Cap and Participation Rates-  Unfortunately, there are poorly constructed index annuities that will not have beneficial caps and participation rates.  It’s critical to know what the objective if your investment is to ensure you get the right type of contract for your needs.  Growth oriented fixed index annuities have the better cap and participation rates than income oriented ‘hybrid’ annuities.

Long Surrender Periods- Again, poorly constructed contracts have long surrender periods.  Let me state for the record that I have yet to see a good indexed annuity with a long surrender period.  For instance, one of my favorite products in this category has a seven-year surrender period.  If you happen to really like it after seven years, then buy it again and make it a fourteen-year strategy.  If it doesn’t work that well then you’re money is free a lot sooner.

Complex Crediting Methods- Using obscure or proprietary indexes or hard to understand crediting methods just makes it hard to understand the annuity.  Try to keep it simple so you can monitor performance and understand what happens on the account.

 

Now- The Basics of How Index Annuities Work

The Pros and Cons of Fixed Index Annuities

The AST Flex Strategy helps you understand the pros and cons of fixed index annuities.

Index Annuities, Fixed Index Annuities, and Equity Indexed Annuities, all mean the same thing. These are all the same insurance product with different labels, but the correct name is a ‘Fixed Index Annuity’.

Fixed Index Annuities are nothing more than fixed annuities with a different method of crediting interest. With a fixed annuity, which is a lot like a CD, the contract owner receives a stated rate of interest each year.

But with an Index Annuity, the appreciation rate is calculated based on growth in an outside market index, like the S+P 500 or the Dow Jones index.

The beauty of Index Annuities is that if the market index goes up, the contract makes money. But if the index goes down, the principal is protected and the contract does not lose value.

Index annuities give consumers a partial participation in the markets, but offer a principal guarantee.

How Insurance Companies Make This Possible

How can insurance companies make a guarantee that your Fixed Index Annuity may go up, but will not go down?

Insurance companies use premiums to invest safely, for their core General Account. Warren Buffet made his money buying insurance companies, and then using the premiums to buy other businesses and increase wealth and financial strength.

In a Fixed Index Annuity, the insurance company uses your premium to invest in bonds, mortgages, and other instruments in the safe, core general account.

But with an indexed annuity, instead of accepting this ‘general account’ fixed rate, the insurance company uses the interest earned from the conservative portfolio to purchase an option position in a market index. An option is simply the right- but not the obligation- to purchase securities at a future date for a contractually stated price.

If the market goes up, the company will exercise the option and realize a gain. They credit a portion of the gain on that option contract to your annuity contract.

If the market moves sideways or down, the option expires worthless and no interest – or gain- is available for crediting.

Potential for Gain with No Risk of Loss

When talking about the pros and cons of fixed index annuities, the biggest positive is that index annuities truly offer you the potential for gains based on market appreciation, without the risk of loss to your principal.

Your principal is not at risk, rather, it’s only the earnings from your principal are invested in potentially higher yield options. Thus, an indexed annuity is a safe asset with upside potential.

This explanation also gives you a good idea why these are called “Fixed Index Annuities”. Income from the FIXED account growth is used to buy options in a market INDEX for potential gain.

If the market rises, you may profit. If the market falls, the company has wagered only your income from the FIXED account, so your principal at all times remains safe.

 Using Fixed Index Annuities

Fixed index annuities are a great alternative to bonds and are a core, safe money holding often used to make sure principal is safe, and to preserve assets and options for later.

The typical buyer of an index annuity seeks the potential for growth without risk of loss, and appreciates principal protection and tax deferred compounding.

But far too often, the simple and elegant fixed index annuity gets clouded with bells and whistles and add-on riders, turning it into more of a ‘hybrid annuity’.

It’s crucial to know that most ‘hybrid annuities’ are not optimized for safety and growth.

In fact, there are over 350 different index annuity contracts on the market today and it’s growing every day.

Far too many agents have one preferred contract they work with for all scenarios. That is just not appropriate, and it’s why we start by understanding your objectives first before looking at any specific contract.

For more than 13 years we have watched, analyzed, and sold these annuities and have come to understand them intimately. Better than anyone, we understand the pros and cons of fixed index annuities and how to use them in retirement.

We’ve produced The Annuity Guide as essential reading for retirees considering Fixed Index Annuities.  It is available for a free download at Annuity Straight Talk, and will help you find the safety and guarantees you need.

Click Here to get your copy today!

If you seek a qualified adviser well versed in the pros and cons of fixed index annuities, please do not hesitate to contact Annuity Straight Talk today on 800-438-5121.

Top 5 Pros and Cons of Annuities

Top 5 Pros and Cons of Annuities

Pros and Cons of Annuities

As with any investment you consider, there are pros and cons of annuities too. When you purchase an annuity, you will want to time your purchase according to your needs, or how far away from retirement you are.

What follows is a discussion of the pros and cons of annuities in general.  This is a very basic starting point, but you can learn a whole lot more in the AST Flex Strategy videos.

Pros and Cons of Annuities – Pro Annuity Points:

The advantages of getting an annuity are absolutely easy to understand. Here are some brief introductions of each.

  • Liquidity: Your money is accessible. Most contracts have an annual withdrawal clause that will allow you to take 10-15% of the account value each year without incurring any penalty.
  • Tax Deferral: Like an IRA, annuity earnings are tax deferred. This makes them more appealing than CDs, money market funds, or other safe investments.
  • Safety of Capital: Your money is safe in annuities. Insurance companies are required to keep cash reserves to ensure this. Most states also have a guarantee fund up to $100,000 per annuity for additional security.
  • Rate of Return: Annuities offer higher rates of return than other safe investments. Currently, annuities are yielding an average of 4% tax deferred in comparison to only 2% taxable with CDs. As our economic markets stabilize, annuity yields should increase accordingly. Annuity rates of return offer more stability in fluctuating markets.
  • Income stream:  Annuities that provide an income stream has been found to be one of the best retirement income vehicles according to a study done by New York Life and the Wharton Business School. After the first annuity contract year, most annuities can provide monthly income payments for your lifetime. Likewise, immediate annuities provide monthly income payments for your lifetime, but they start immediately.

Pros and Cons of Annuities – Negative Points:

The wrong annuity product can have negative effects on your retirement. It is important to know these cons so you do not purchase the wrong product for you.

  • Surrender Schedule: Because annuity contracts have surrender charges for withdrawing money before the contract matures in lieu of up front sales charges, you will be obligated to the terms of the contract. Some surrender schedules can be as long as ten years.
  • Short Term Money: If there is a chance you need all of your money returned to you in the short-term, say one to two years, an annuity is not right for you. It is best to only invest funds you will not need for at least the next five years.
  • Sales Commissions: As with any purchase, the sales agent will earn a sales commission. An unethical sales agent may not have your best interests at heart and will not show you the right product for your needs.
  • Liquidity: You may be referring back to the pros section and find liquidity featured there as well. While liquidity can be a pro, it can also be a negative in so much as you realistically knowing how much money you may need to access and when you will need it. Without knowing these answers, liquidity can easily turn into a negative.

Annuities have pros and cons, and this brief summary should help you analyze your annuity needs. Use these guidelines to determine what factors are important to you and you will have an easier time selecting the right annuity for you.

Understand The Pros and Cons of Hybrid Annuities

The Pros and cons of Hybrid Annuities

The Pros and Cons of Hybrid Annuities

Like all annuities, there are pros and cons of hybrid annuities.  Remember, a ‘Hybrid Annuity’ is just a fixed index annuity with additional add- on riders.

So in looking at the pros and cons of these hybrid annuities, be sure you actually NEED all the benefits these contracts offer.  Nothing comes for free, and why pay for something you don’t need?

(This is the main message of the FREE AST Flex Strategy videos, so check it out!)

Pros and Cons Of Hybrid Annuities- The Positives

First, the pros: Hybrid Annuities offer a unique combination of benefits that accomplish many typical objectives in retirement income planning:

  1. Hybrid annuities offer partial market participation
  2. As with all fixed index annuities, there is no risk of loss to principal
  3. With guaranteed lifetime income riders, you have lifetime income
  4. As with all annuities, there is the potential for liquidity through withdrawals
  5. Unlike variable annuities, one of the main positive qualities of hybrid annuities is that they come with very low fees
  6. Finally, another pro to hybrid annuities is additional Long Term Care and Enhanced Death Benefit options

This really is a wide range of benefits rolled into one product.  For many people, it’s just perfect.  Lets look in a bit more detail at the pros….

Lifetime Income- This is reason #1 people are considering Hybrid Annuities.  Securing sufficient income for life is key to optimizing your assets.  Hybrid annuities are one way of achieving lifetime income.

Principle Guarantee- As with an Index Annuity, your initial investment has no risk of loss and may even be guaranteed to grow at a minimum rate.  The contract will state the minimum amount you can expect to receive at the end of the surrender period.

Tax Deferral– Like other annuities, the principal grows on a tax-deferred basis.

Reset Points Lock In Gains – Depending on the crediting method in your contract, reset dates may lock in gains that subsequently erode in the marketplace.  Timing is everything, but we have seen index annuities outperform markets due to the reset dates.

Charles Darwin

“The mule always appears to me a most surprising animal. That a hybrid should possess more reason, memory, obstinacy, social affection, powers of muscular endurance, and length of life, than either of its parents, seems to indicate that art has here outdone nature.

Charles Darwin

Now: The Problems With Hybrid Annuities

It’s critical to take a moment to investigate both the pros and the cons of the hybrid annuity.  As with anything, there are downsides to be aware of.

Income- You’re right, we listed this a one of the benefits of hybrid annuities too, however often we find that using an income rider on an index annuity is not the most efficient way to secure guaranteed income.

Complexity: Cap Rates, Participation Rates, Crediting Methods, Spreads:

All index annuities have a learning curve to overcome and hybrid annuities are no exception.  It can sometimes be hard to individuals to see the benefits when grappling with unfamiliar terms and calculations.

But, lucky for you, we at Annuity Straight Talk have recorded a superb and concise index annuity training video– just sign up to the right and get started on your way to being an expert in no time.  If you can get over the hump and understand how it all works, they really do offer a lot of benefits.

Perception Issues: Income Rider Account Value Vs Real Acct Value:

Perhaps our biggest issue when discussing Pros and Cons of Hybrid Annuities is one of perception and deceptive marketing by others.

If someone is telling you an annuity they offer is guaranteed to go up by some rate, like 8% per year roll up, they are lying to you.  It’s deceptive marketing that gives these products a bad name.

Rather, the Income Account Value may be guaranteed to roll up at 8%… but that is not real money you could walk away with.  If you don’t understand this concept yet, be sure to sign up and get our Hybrid Annuity Product Detail Report , and also, read up on Income Riders.

Final Negative: Long Surrender Periods- Hybrid annuities with lifetime income riders should be approached as a one way investment that you don’t plan to surrender.  You should consider the money invested as a permanent investment in a future lifetime income stream.  With that mindset, the long surrender is a non-issue, however if circumstances change, you should be aware that early surrender could be costly.

Hybrid Annuities: Pros And Cons Summary

How does it stack up for you with the Pros and Cons of Hybrid Annuities? Does the cap, participation, spread, and crediting method boggle the mind, or are you fine with the partial participation and  see the benefit in downside protection?

Feel free to explore the rest of these pages on Hybrid Annuities, but sometimes it’s best to just give us a call to go over your situation.  If you seek a qualified adviser well versed in Hybrid Annuities, please do not hesitate to contact us.