Index Annuities Have Evolved

Using a good indexed annuity, with the right perspective and strategy, can solve all the concerns a person might have in retirement. This week is a shout out to Carl in Florida who bought one from me about five years ago.

Carl came to visit last summer and after several years of working together, we have become good friends. He’s not the only one but he is more vocal than most and is more than happy to tell me when his expectations are not met. I don’t know about you but my best friends are the ones that give me the most grief.

Casey, Jim, and Chunk are my fishing and hunting buddies. None of them would hesitate to give me a hard time if I did something wrong in the field or on a stream. And it goes right back at them if I see something that isn’t right.

Carl reads just about every one of these newsletters and he asked me a direct question after seeing what I sent out last week. The link is at the bottom if you missed it. He basically asked me how one person can get an average over 6% in two straight years when he’s never been able to do more than 4%.

Well, I think he is averaging over 4% so he has done better at times but it’s not his job to give me the benefit of the doubt. Now, part of it has to do with timing as annuities all hit differently at any given time of the year. Carl’s contract resets in July while Neil’s contract resets in October. Each is going to perform differently in any given year. It stands to reason since index annuities are tied to the market and the market is always changing.

But what’s more important is that several changes have happened in the annuity market since Carl bought his contract. The diversity of index options has increased across all products which has provided more opportunities for people with newer contracts.

Back in the day, or 5-10 years ago, most products had simple options like a basic cap rate on the S&P 500. I’ve seen a lot of old contracts that don’t have much else. So it’s not a bad thing but in many cases, the yield potential is more limited than it is with the new options.

Over the past few years, insurance companies have continued to offer new indices that offer more potential using participation and spread rates with no cap. A new index with very little performance history doesn’t always inspire confidence so you have to be selective and it pays to have at least a couple of years of real data to analyze so you can see how it tracks with the general stock market.

There are a couple of reasons why this happened.

First, insurance companies want to differentiate and all of them are trying to beat the competition so partnering with an investment firm to create an index is something all companies have embraced. Some of the indices work out and others don’t so you have to hope you guess correctly.

Second, the S&P 500 is a heavily traded index with lots of volatility and speculation involved in the pricing so options are expensive. That brings cap and participation rates down and limits potential. Using a proprietary index, an insurance company can much more easily predict cost so rates are higher and more likely to remain stable throughout the contract.

The benefit for consumers is that you now have more options. Carl and Neil have the same contract but Neil’s was purchased three years later so it has a couple more options that Carl doesn’t have. There’s the performance difference, along with the timing of Neil hitting two good performance years back to back.

Many contracts in the past were limited to a few index options whereas some of my favorites today have more than a dozen. When I look at a new contract in its entirety, I always tell people that there’s a double-digit yield in there somewhere and a solid 5% average if we do it right. Choose wisely and be patient.  Everyone with a good contract, including Carl, has upside potential. Index annuities have evolved and that provides more opportunity for growth on safe money.

Bryan Anderson

Further Readings

Fixed Indexed Annuity Withdrawals

Indexed Annuity Crediting Methods

Uderstanding Index Annuity Fees

Last Updated on February 19, 2024 by Bryan Anderson