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I'm really wanting to purchase a 10-year fixed index annutity. It pays 15 per cent bonus the first year. My principle is guaranteed at beginning of the year. I can also have gains from S&P, Nas, and other pots to invest. My problem is I can't find a lot of info about these funds. And can't really find a downside to this investment. I will retire in about 10 years and this sounds like a good way to not loose money in the stock market. Where is info on this product?

The thing that makes fixed index annuities so attractive is the commissions they pay out to those who sell them. Trust me, your 15 percent "bonus" will be taken away, and more, in all the calculations of your gain. Your return will be less than the return on equities because (1) dividends aren't included and (2) your participation in price gains is limited to an absolute percentage or a portion of actual gains.

Bottom line: You won't get the return you're led to believe you'll get and, worse, your money is tied up for a really long time. The only way to access it is to accept monster penalties.

Here's a link to a column on this insurance product:

http://assetbuilder.com/blogs/scott_burns/archive/2007/04/14/Equity_2D00_Indexed-Annuities_3A00_-Long-on-Sizzle_2C00_-Short-on-Steak.aspx 

Scott

I'm a financial planner, and also an actuary. I personally own a fixed index annuity.   It's about 10% of the total value of my fixed portfolio.  I've also worked for an insurance company home office, and I am very familiar with annuity product design.

You didn't identify the company or product name, but I suspect the fixed indexed annuity described is a "two account" product.  There is an "annuity value", which includes the bonus, and a separate calculation of the "surrender value".  Even if you hold the contract for all 10 years, the only way to get the bonus is probably to annuitize...   I agree with Scott, that most fixed index annuities have very high expenses, and don't deliver significant value to clients.  The likely commission structure in the product you describe could be as high as 15% to 17.5% of the premium.  Someone has to pay for that.....and it's you!

But, expect to see a new generation of Fixed Indexed Annuities, with much lower and shorter surrender charges.  Also expect to see a disclosure of expenses, and a simple illustration that shows clearly year by year, over the surrender charge period, the guaranteed surrender value, and the hypothetical performance.  In the Texas market place, there are at least 3 products which also have a Return of Premium feature...which guarantees you a 100% refund, with no surrender penalties, at any point in time and a 3 to 7 year surrender charge period.

 As you might expect, the commissions paid on the new generation of products is much lower..... in the 3% to 5% range. If you select a good company, a product with low expenses, and only the features you really need, I believe fixed indexed annuities are a good value for a portion of your fixed portfolio.

My fixed indexed annuity, purchased in August 2005, can be surrendered today with a profit of 9% after all charges.  The holding period expires in 2012.  I'm 59.5.   My professionally managed portfolio is down 11% in the same period.  Overtime, I'm confident that my professionally managed porfolio will outperform the fixed index annuities.   I'm also confident that over time my fixed indexed annuity will earn more than my CDs  and savings accounts.

 

I have a related product with a few more details, thanks.

 I am almost 63 and plan to, knock on wood, work another 4-7 years.  My wife is 59.  We have about $900K in self directed IRA’s.  Like everyone else, I have been trying to preserve value is this difficult market.  I have had several variable annuities pitched to me that I think have appealing aspects to them.  I know you are negative on variable annuities and I understand your reasoning.  Since I would be using IRA money the tax argument of capital gains versus ordinary income seems to go away.  What I find appealing about the variable annuities I have been looking at, offered by Prudential, ING, Hartford, etc. and a specific example would be Prudential’s Highest Daily Lifetime Seven, is that if you can afford to leave the money in for 10 years you get the following:

 

• They will make 6-7% contribution to the principle when you sign up.
• Guaranteed compounded increase in principle of 7%
• The 7% is compounded from the peak value in the account from any point during the 10 year period
• At the end of the 10 years you can take the lump sum or convert to an annuity
• Pay out upon death

 

I know that in theory, on average, the market grows at a faster rate and the money could be worth more if invested in a low cost index fund.  However, with this annuity you know that your principle will double in ten years and can then you can decide what action to take.  If I know that I will be want to access the funds in 10 years, I do no have to worry about where the market is going to be at that point in time. 

 

I can see that my wife IRA’s, that was under professional management, is that it is at basically at the same value as it was in 1998, 10 years later.

 

What I missing.

 

Thanks,

 

CJ from Austin 

 

Hi Craig.

I have no doubt that you are accurately reporting what the salesman told you.  There is even a chance that the salesman believes what he said.

Before you commit any money, please, take the written contract to a lawyer, and have him tell you exactly what it means.  I would bet that what the written contract says is substantially different than what the salesman said.

If for ANY reason the salesman won't give you the contract, place your hand firmly on your wallet, and run for the exit.

Bryan

The Prudential product you described is a variable annuity, not a fixed indexed annuity.

The bonus feature is an illusion.   So is the double up.  The sales literature implies that your "money will double"...but the devil is in the details of the contract language.

If your goal is to have a lifetime income, based upon the Prudential formulae you described with surprising detail, you'll be OK to put a portion of your 900k in that variable annuity.   That's your account value that doubles.  The death benefits double.   But, you will not have a cash surrender value that has tracked 7% unless the market has averaged 10%.

The total internal charges will be about 3%.  So, if the market averages 7% over the next 10 years, you will have an income account based upon the 7% promise (roughly a double).  However, the cash surrender value, which reflects the gross earnings minus the product charges, will only be about 4% net return. 

There is an Ameritas variable annuity product, offered by fee-based financial planners, which has similar income features and guarantees as the Prudential product, but no commissions.   The internal charges are much lower...but, still about 1.5% total. Not a bad idea for someone with only 100K, but you've got enough to be more diversified and get even lower expenses.

Furthermore, the principal guarantee in any variable annuity is only triggered at a particular point in time.  Generally, that is 7 to 10 years from the purchase date, and happens in a very narrow window...like 30 days.

 If your real concern is looking at a statement and seeing a drop in principal value (of your cash surrender value), the variable annuity won't give you the comfort you desire.

 So...if the market really earns 10%, you didn't need the guarantee and will have earned 7%.  If the market really earns 7%, you didn't need the guarantee and will have earned 4%.  If the market tanks, you will have made a good choice and the critics (including me) will look like fools.

I haven't reviewed the prospectus of the Prudential variable annuity product line in the last 30 days, but as I recall, in order to get the guarantees, you are limited in the fund selection and manager selection to a formula that is amazingly similar to Scott's couch-tater approach. 

Instead, I'd  recommend you consider a ladder of fixed (CD-style) annuities that are currently yielding 5% to 6%.... and carefully selected fixed-indexed annuities without bonuses or long surrender charges for a portion of your 900K...that will earn between 3% and 10%+ .   You can find all the features you need in fixed annuities with 5 to 7 year surrender charge periods.  You don't need to lock in for 10 years.  These products have a cash surrender value which can be guaranteed every single day after you purchase them, not just in a 30 day window in the future.

Probably 600K of the 900K into such a ladder would get you a real guarantee of income, in an amount equal to the smoke and mirrors of the variable annuity features, and the guarantee to avoid loss that you desire every single day.

The balance of the 300K could be invested, with greater peace of mind, in a balanced mutual fund, or matrix of ETF's as a true inflation hedge.  

 

 

 

 

Thanks for you response.  I will try to decipher the contract.

CJ,

I was introduced to Prudential’s Highest Daily Lifetime Seven yesterday by my Financial Advisor.  Everything about it sounds positive about it except for the extra fee %.   But I realize that you're essentially insuring your investment so I think the fee would be palatable.  But there must be more downside to it than meets the eye.  I don't have a contract, just the product literature.

I'd appreciate any information you can share from the contract if you get your hands one one.

Thanks,

DD 

It still boggles my mind when I read and hear people out there still clinging to the notion that somehow you will get paid this huge commission for a indexed annuity sale. I've been working for years in the insurance industry and will tell you that if you plan on using an indexed annuity in your portfolio, do not take a surrender period longer than you are willing to be comfortable with now. I have no problem in stating that I for one would never put anyone into a duration longer than 10 years. I have no problem with offering a bonus, and suffice it to say what was left out of the above conversations is that when a potential client is offered a bonus, it typically comes at the reduction of the agent commission percentage. The higher the bonus, the lower the comp. It's that simple. As for front end loaded bonuses or those requiring annuitization, it comes down to proper planning for what is needed. If you need lump sum access I would never give you a bonus contingent on annuitization....but then again, there is that word, annuity which is defined as an investment that is be paid out (annuitized) over a period of time to create an income stream consisting of your principle and taxable gains. So those that cry about the bonus being linked to a payout are not really wanting to sell annuities in the first place. You again, need to define what the client needs and stick to that plan. Have there been products on the market that were bad for the client? Yes, some had waayyy too long surrender periods and charges for sure.However there are plenty of products that offer reasonable time lines and surrender charges for the public to purchase. I'm sorry but the Suze Orman concept of bashing a fixed annuity is very much a worn out dog. Do some research, if someone is promising 8% average annual return, they are not being truthful, if they say from 5% to 6.5% that is acceptable. I would go to this site for further indexed information....www.indexannuity,org By the way, in light of the current market situation, I sure am glad that I have a nice portion of my investments in indexed annuities....I may have a 0% growth year but it's much better than those invested in the markets are doing. Plus once the market starts to gain again...so will I. TPR