Case Study- Is A Fixed Index Annuity The Right Tool For This Job?

This post is one of a series of questions and answers from our readers who are seeking the right annuity for their needs.

This came in via email:  This reader listed the following parameters for their desired annuity;

1. An annuity that keeps 100% of my principle investment for my children.

2. Pays the most income per month

3. Has the lowest fees.

4. Pays on 100% of my investment.

5. Protects my principle investment in a down market but increases my principle in an up market.

Great parameters, and this describes to a T the attractiveness of fixed index annuities, often marketed as a ‘hybrid annuity’.  The easy answer to this inquiry is to find the best Fixed Index Annuity for this individual, however that is not truly the best combination of Safety, Flexibility, and Profitability.  You can’t wrap all these goals into one annuity and expect each goal to be met perfectly.

Our answer to this question is below:


I appreciate the brevity and clarity of your question, unfortunately, the answer is long.  Here’s the summary: you can’t guarantee MAX principal/inheritance amounts AND take out Max income for life from the same annuity contract, and have both goals perform to their full potential.   One or the other of these objectives will suffer and your probability of failure goes up.  If you’re willing to let your future inheritance suffer, a Fixed Index Annuity may be just the ticket.

However, you CAN guarantee that BOTH goals are maximized with two annuity contracts- a deferred lump sum annuity paying your heirs, and an income annuity supporting you.  Separating your goals and using the right tools for each job locks in BOTH objectives, and does so at a lower cost, with lower fees, and with higher degree of certainty.

Here’s the full answer:

We believe that what makes the most sense is for you to use a deferred annuity for the inheritance, and have a separate income focused annuity for income purposes.  Trying to accomplish both goals with one hybrid annuity is likely to be disappointing.

What you asked for is a perfect description of the benefits that are used to market index annuities, however with the important caveat that if you are intent on absolutely preserving your investment base for inheritance, you will not be able to draw income in down years without invading principle.  Did you see our posts on ‘reverse dollar cost averaging”? This would be your plight.  You can’t guarantee principal AND take MAX income without some consequences.

A look at a Fixed Index Annuity with Lifetime Income rider illustration will show impressive growth in the ‘income base’ or ‘benefit base’, much lower projected growth in actual account value, then when income starts, you will see the account value dissipate in 10 years or so.  Income benefits are paid our of YOUR money first before you ride on the Insurance company’s shoulders, therefore, its’ quite likely there will be little or nothing left for inheritance.

Any scenario with a product whose performance may vary (variable annuity or index annuity) where you absolutely must have a certain income every month could box you in to spending principal.  In fact,  if you avail yourself of the guaranteed income benefits riders in index annuities, those income streams WILL erode your account value principal and put your inheritance goals in jeopardy.

There are always tradeoffs, but please consider the following alternative.

By using secondary market annuities, whose returns are fixed, and guaranteed, but which come in a variety of timelines, we could put together a winning solution.

We would use a deferred growth contract so that the future payout of the deferred contract equals or exceeds your total initial investment today.  Then, additionally, we would use an immediate income type contract which offers the highest potential payout for income purposes now.

This income could also be obtained with a plain immediate annuity if you prefer, which offers longevity insurance, or an index annuity with the GLWB type income benefits.  However, I must say our secondary market annuities almost always beat the index annuity assumptions and come with no fees, variables, or assumed future rates of return.

Now, what I’ll describe sets a period certain date when your inheritance dollars will be paid- and regardless of your passing.  If you want it to be contingent on your life, then we should look at life insurance to fill that need.  However I think you’ll see my proposed solution below is superior.


Basically what I’m thinking of is a scenario like this- let’s assume you have $600,000 cash today, and you wish your heirs to receive $600,000.  I’ll assume you are 60 and in great health, so conceivably could enjoy another 30 years, and you want the most income possible in that time period.

By placing roughly $100,000 of your portfolio on a long term, deferred, lump sum contract, you lock up and guarantee that you or your heirs will receive this windfall at a specific date in the future.  I’ll illustrate with this currently available secondary market annuity:
$95,552 investment today, pays $634,090 in one check on September 5th, 2039.  You can set this up today in an LLC, and gift the LLC membership to your heirs over time.  When the income comes in the future, it will pay to the LLC and it won’t matter if you are still living or not.

So- future inheritance, locked in and guaranteed today.

Now, for income….


Based on my hypothetical scenario, you still have $500,000 to work with to generate income.  As I said, you could look at an immediate annuity which will ensure against your longevity risk, or you can consider other period certain secondary annuities.  Or, you can consider an index annuity but take advantage of all the income benefits and bonuses and riders and disregard the account value concerns.

Because your took care of the inheritance with your long term deferred contract, you can focus solely on income now.  Depending on your age, a Secondary Annuity or an Immediate will likely pay more than an index or hybrid product.

A secondary annuity or an index annuity will also ensure additional inheritance to your heirs- an immediate annuity will not.

To place this $500,000 in secondary market annuities, you will end up with much higher guaranteed and certain payments, but it will be a variety of contracts and terms.  That’s just the nature of this marketplace.  This contract is illustrative of one we’d use in crafting your portfolio:


An immediate annuity on a 60 yr old male is appx $2900/ month income with a $500,000 premium, and depending on various factors.

The same premium in a fixed index annuity with no deferral period is appx $2200/ month.  Again, there are many varieties and contracts to chose from.

We would most likely get from $3500 to $4500 per month in Secondary market annuity cash flows over a 30 year certain period, from multiple carriers.  This will depend on availability and readiness to take action, however.

Now, as to the fees:


There are no costs or fees on the Secondary Market Annuities- the total cost is the purchase price.   Likewise, with an immediate annuity, there are no ongoing fees- you will simply trade your lump sum for a monthly lifetime check.

Bear in mind, too, we have nearly every annuity available nationally at our disposal- we don’t market one particular company or product, but rather, market our services putting the whole package together.  We’re not captive to one company.

Additionally, we won’t sell certain B rated, Index Annuity products that are marketed as ‘Hybrid Annuities’ with Swiss Army Knife lists of characteristics.  We don’t see the credit risk of the issuer as one worth taking.

As to the income component of your scenario, I need a few pieces of info such as your home state to illustrate further……

Would you like this sort of attention and analysis of your annuity questions and retirement goals? Contact Us today!

Written By

Bryan Anderson

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