If you have listened to the radio at all recently, you have likely heard some advertisements that say something like, “my clients have never lost money in the market” or “your money can increase based on the S&P Index and will never lose.” There is some truth in these statements, but we believe clients are better served to go much deeper than the sound bite to determine if this type of annuity truly fits in their portfolio. Indexed annuities available today can have as many as 15 different data points or decisions that go into constructing this type of annuity. The client does not need to decide on every detail, but they at least should be made aware of how features and provisions have an effect on the ultimate performance of the contract. So many times, we have clients say to us, “I never knew that,” or “no one ever explained that to me,” and the end result is that the product performance is drastically different than what they were expecting. In evaluating these products, be sure to insist on knowing as much as you can about ALL of the features, including commissions, and not just the items being promoted.
We believe that an indexed annuity should be measured and benchmarked against other fixed-income type investments, such as bonds, cds, etc. It should not be viewed as a stock or benchmarked against other stock type returns. The client determines which index they would like to have their crediting method based upon, and most often it is the S&P 500 Index. It is very important to know that in an indexed annuity, your funds are not actually invested in the S&P Index; therefore, the return will not include any actual dividends paid out by corporations in the S&P 500 Index. Technically, the insurance company measures what happens in the index according to a client’s selected method and then applies the results to the annuity contract. If the index is up in a particular period, the client will receive the benefit of the increase according to the predetermined method. If the index is down, then the client does not lose, there will just be no interest credited for that period and the values would remain stable. Additionally, if the index is negative for the entire length of the annuity contract, the insurance carrier does provide at least a minimum interest rate that they will guarantee at the end of the contract so the client would at least have had their money earn some interest. To add to the complexity, a client can also add riders to their indexed annuity that offer a Guaranteed Minimum Withdrawal, a Death Benefit, Nursing Home provisions, and some even allow for loans against the cash value of the annuity. We do not subscribe to the idea of a “one size fits all” mindset where these products can do it all. We do believe that a properly designed indexed annuity can meet a targeted objective of a good fixed-income return with some solid guaranteed protection features.
What does all of this mean to me? Indexed annuities, if understood and applied in the right circumstances, can add real value to a client’s overall portfolio. Remember, if all that is being focused on is two or three of the “key” features of the indexed annuity, you want to at least be sure that the other 12 or 13 things don’t come back to bite you.