Any experience with Fixed Index Annuity?

[TNBigfoot]

I’m looking over a proposal for a fixed index annuity and wanted to see if this forum had any experience or held this type of annuity.

From what I’m seeing;
Some level of asset protection
Better return than fixed income options
Up to 10% per year for withdrawal penalty free

But:
Poor liquidity
Capped returns

This would be to provide current income needs over time

Thanks in advance for your thoughts.

 

[pb4uski]

Be careful in assessing "better return than fixed income options"... that is rarely true.

For example, take a 10 year period certain annuity quoted on immediateannuities.com for a 65yo male in FL since that annuity takes mortality out of the picture... $120,000 premium paid today would result in a payout of $1,216/month for 10 years... the return... solving for the implicit interest rate in the cash flows... is only 4.06%.

=RATE(10*12,1216,-120000,0)*12 = 4.06%

While it would be a chore to construct a fixed income ladder with 120 monthly payments, you could reasonably easily construct a fixed income ladder with ten $14,592 annual payments or perhaps even forty $3,648 quarterly payments that would easily yield over 4.06% given the current yield curve... the point being "returns" are not attractive at all.

Now, shifting to a life annuity, you also need to factor in when you will die. The table below shows the internal rate of return of a life annuity with a $120,000 single premium for a 60yo male in FL which pays $754/month. The "payout rate" is 7.54% [($745*12)/$120,000] but that is NOT the return. The table below shows the internal rate of return if you live to stated ages.

If you live to 83 (average age), the actual return is only 3.6%... very different from the 7.54% payout rate. Why is that? Because a piece of the $754/month benefit is simply a return OF your money and another part is a return ON your money.

As the table shows, if you die early, the life annuity is a bad deal, but if you live long (and prosper?) then the internal rate of return gradually approaches the 7.54% payout rate.

How lucky do you feel?

Lump Sum		120,000
Monthly benefit		754
Payout rate		7.54%
Age	n	IRR
65	0
66	1	-97.7%
67	2	-77.4%
68	3	-55.6%
69	4	-39.7%
70	5	-28.7%
71	6	-20.9%
72	7	-15.2%
73	8	-11.0%
74	9	-7.7%
75	10	-5.2%
76	11	-3.2%
77	12	-1.6%
78	13	-0.3%
79	14	0.8%
80	15	1.7%
81	16	2.4%
82	17	3.1%
83	18	3.6%
84	19	4.1%
85	20	4.5%
86	21	4.9%
87	22	5.2%
88	23	5.4%
89	24	5.7%
90	25	5.9%
91	26	6.1%
92	27	6.2%
93	28	6.4%
94	29	6.5%
95	30	6.6%
96	31	6.7%
97	32	6.8%
98	33	6.9%
99	34	7.0%
100	35	7.1%

 

[ShokWaveRider]

I have a MYGA, it plods along, good compound return, 10% withdrawals allowed. No issues, and it is tax deferred.

 

[VanWinkle]

A fixed indexed annuity gives CD type returns while your money is out of your control for up to 10 years. The "bonus" money offered by some is not a bonus as the funds are taken out of the contract by paying less interest. As someone that is currently trying to get a friend out of 4 of these things, just don't do it. Do a MYGA if you are not inclined to invest in the stock market. You can get 5.15 % on a 5 year MYGA that will be your lump sum again in 5 years with 10% yearly withdrawals allowed. Don't fall for the Lifetime income benefit rider that promises 6-8% a year as that is just funny money that is never really yours. Blueprint income is a great place to look at MYGA rates. Your fixed indexed annuity sales person is going to hate not getting that 6-8% commission off of you.

Good Luck,

VW

 

[TNBigfoot]

A fixed indexed annuity gives CD type returns while your money is out of your control for up to 10 years. The "bonus" money offered by some is not a bonus as the funds are taken out of the contract by paying less interest. As someone that is currently trying to get a friend out of 4 of these things, just don't do it. Do a MYGA if you are not inclined to invest in the stock market. You can get 5.15 % on a 5 year MYGA that will be your lump sum again in 5 years with 10% yearly withdrawals allowed. Don't fall for the Lifetime income benefit rider that promises 6-8% a year as that is just funny money that is never really yours. Blueprint income is a great place to look at MYGA rates. Your fixed indexed annuity sales person is going to hate not getting that 6-8% commission off of you.



Good Luck,



VW

Thanks VW. The Fixed Index Annuity I’m looking at is invested in equities (Blackrock + S&P 500 Index). So there is some realization of market returns albeit with some caps. The protection comes in if an index’s return drops below zero, then you retain current account balance.

So a different animal fro MYGA or Fixed Income Annuity.

 

[Happyras]

I would say Run it’s a horrible option. The return is low and the liquidity is so with surrender cost.

There are so many terms buried in their contracts. It’s hard to truly evaluate.

You can do super well just buying SPY and selling covered calls just roll them out. You do the same thing of selling your upside while collecting a risk premium. It’s still pays a higher yield, the most long-term bonds. Actually much higher..

 

[VanWinkle]

Thanks VW. The Fixed Index Annuity I’m looking at is invested in equities (Blackrock + S&P 500 Index). So there is some realization of market returns albeit with some caps. The protection comes in if an index’s return drops below zero, then you retain current account balance.

So a different animal fro MYGA or Fixed Income Annuity.

The cap may be monthly and will cap gains at 1.1%. That sounds great, but there is no cap on the downside. The market can gain 20% for the year, but you may not get any of it due to the monthly cap and unlimited downside. If you have a LIBR(or other riders) it will lose money due to expenses if there is no capped gain for the year. Friend lost 6000 last year from fees for riders. I think you can do as well in a high yield money market making 4% fight now.
I'll say it again as a former licensed insurance salesman, just say no.

VW

 

[VanWinkle]

I have a MYGA, it plods along, good compound return, 10% withdrawals allowed. No issues, and it is tax deferred.

+100

 

[GravitySucks]

If you read the contract and understand the fees, expected returns vs guaranteed returns and it still meets your needs then go ahead.
DSis had me read the contract she was sent for a similar product and I could not figure the expected returns and fees in under 2 hours. She bought it anyway and 3 years later is happy, even though she doesn’t really know what returns to expect.
I’m not against annuities and am happy with my SPIA but I try not to invest in what I can’t understand.

 

[pb4uski]

Thanks VW. The Fixed Index Annuity I’m looking at is invested in equities (Blackrock + S&P 500 Index). So there is some realization of market returns albeit with some caps. The protection comes in if an index’s return drops below zero, then you retain current account balance.

So a different animal fro MYGA or Fixed Income Annuity.

I would say Run it’s a horrible option. The return is low and the liquidity is so with surrender cost.

There are so many terms buried in their contracts. It’s hard to truly evaluate.

You can do super well just buying SPY and selling covered calls just roll them out. You do the same thing of selling your upside while collecting a risk premium. It’s still pays a higher yield, the most long-term bonds. Actually much higher..

+2 Not a good option

I misread and thought you were talking about a MYGA or fixed income annuity and missed the index piece.

 

[COcheesehead]

I made the mistake of buying one of these years ago before I was educated. Yes, you get capped index returns, but then look at what they take out in expenses each year. There was a floor or minimum return, but below what I could have gotten on my own and don’t look at the agent’s commission. It will shock you.

I took my money out when I was first able. Lesson learned.
With today’s fixed income returns, you are likely to get similar results to a capped index without having your money held captive.

 

[OldShooter]

Thanks VW. The Fixed Index Annuity I’m looking at is invested in equities (Blackrock + S&P 500 Index). So there is some realization of market returns albeit with some caps. ...

Read the prospectus. Any of these I have seen have upside based on the sticker price of the index, not the total return. In addition to keeping all the gains beyond the cap, the insurance company probably keeps all the dividends for itself.

While you're at it, search the prospectus for words like "fee' and "expense." I did that once on a 208 page index annuity and it was incredible. Fees for putting money in, fees for taking money out, annual fees, ... On and on.

I tell the students in my adult ed investing class these two things: If you don't understand an investment don’t' buy it. aka Read and understand the whole prospectus. Second: The more complicated an investment is the more likely that it was designed to make money for the seller, not for the buyer.

 

[Al18]

MYGA and SPIA are the best, low cost options if you want some guaranteed income. Once you start adding indexing, inflation protection, etc the fees go up and payout rates go down. If you want some guaranteed income between ages 59 1/2 and before you claim SS, then a small annuity is not a bad option IMHO