What Critics are Saying About Fixed Index Annuities
(And Why They are Mostly Right)
Fixed Index Annuities have grown dramatically in recent years, with
billions of dollars flowing into them. With that popularity has come
some criticism, some of it well founded and deserved. Much of the
deserved criticism has come about as a result of unscrupulous sales
tactics of some in the annuity industry who have falsely portrayed
Fixed Index Annuities as stock market investments (they most certainly
are not), or who have used misleading and aggressive sales approaches
to manipulate people into buying their product. Unfortunately, every
industry has their share of unscrupulous sales people. The annuity
industry has not been immune to this, but unfortunately the few people
who do things the wrong way get a lot more attention than the vast
majority who do things right.
There are essentially four major criticisms of Fixed Index Annuities and each case has some very good points.
One: "Fixed Index Annuities can be too complicated."
True.
Like all financial products today (have you tried to actually read a
mutual fund prospectus lately?), they can be fairly complex, with
different companies using different methods to calculate how they
credit interest. The value of working with an advisor who is both
competent and courteous, is that the product you are considering can be
explained to you in a way that makes sense, so that you can make a
thoughtful and informed decision about whether it is right for you.
Two: "They won't keep up with the stock market."
True.
As has been stated over and over again on this website, Fixed Index
Annuities are not stock market investments and are not designed to
match or beat the returns of the market. Your interest is linked to a
percentage of a market index like the S&P 500, but you will not
receive all of the upside when the index goes up. There is no such
thing as a free lunch. You give up some of the upside in return for a
guarantee against market loss.
Three: "You will be tying up your money."
Partially
True. Fixed Index Annuities are not money market accounts that you can
jump in and out of without consequence. You are committing your money
for a period of time. Fixed Index Annuities have terms that range from
as little as one year to as much as ten, with the longer terms
providing more value such as increased upside potential and even
upfront bonuses on your money of typically around 5 - 10%.
However,
during that term you do have access to significant amounts of your
money without penalty every year. Some Fixed Index Annuities even come
with checkbooks, with which you can withdraw without penalty from 10%
to 20% of your funds in a given year. Additionally, it is highly
recommended that you establish a cash emergency account outside of the
annuity to handle (along with free withdrawals from the annuity) any
foreseeable emergency.
Also, most annuities have a
provision that will make your funds liquid in the event of you needing
nursing home care. At the end of the term the annuity is completely
liquid, and in the event of your death it becomes immediately liquid to
your beneficiary.
Four: "Annuities are sold too aggressively."
True.
There are some in the annuity industry (just like there are some in
every industry) who use aggressive and inappropriate tactics to solicit
sales. You should consider attending a seminar that is conducted in
your area. Any advisor worth their salt will want to have a minimum of
three meetings with you if you decide to explore the annuity
option.
- The first meeting should be to find out what your concerns and objectives are.
- The second meeting is when a written plan and recommendations are presented and explained.
- The
third meeting is important to answer any additional questions you will
have and (if you are ready) to move forward to implement any changes
that you have decided to make.
If a financial person you are dealing with ever tries to hurry you to make a decision, don't just walk away - Run!
Notice: Learn more about our team and why you may want to consider contacting us. We are a Maryland-based business for local residents but we can also direct you to the appropriate agent in your area regarding the same strategies that we offer to improve your safe money management plan. Your future and your family will thank you for it!
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