fixed index annuities

Over the years, and in increasing numbers, I have had clients contact me about an opportunity they have received for a fixed indexed annuity. These annuities are heavily marketed by mail, radio programs, and through free seminars at steak houses as the one-size-fits-all financial product for retirement income. I decided to share this article because there are important things to know about fixed indexed annuities before investing in them. I am not against all fixed indexed annuities. For many years I have placed a small portion of my clients’ investable assets in them if it was appropriate and fit their investment objective. But there are aspects related to fixed index annuities that concern me that I need to share.

The Good

Many offer a guaranteed minimum income for life based on the claims paying ability of the insurance company.

They may produce a better rate of return than today’s certificate of deposit and savings rates.

The Bad

Large surrender penalties apply for early withdrawals. In some cases, these penalties may last up to 15 years or even a lifetime.

Because of low cap rates today and returns, they do not keep up with inflation which deteriorates purchasing power over the long term.

The Ugly

There is very little oversight for salespeople who only deal in fixed indexed annuities.This is not true of someone licensed to offer securities (stocks, bonds and mutual funds) in addition to fixed indexed annuities, and why some annuity only salespeople may choose not be become securities licensed. When anyone is securities licensed they are under compliance and disclosure guidelines they must follow. I actually just received 20 pages worth of compliance guidelines for selling fixed, fixed indexed, and variable annuities with which I must comply. Working with someone who is licensed for more than annuities ensures their full understanding of the rules and regulations regarding the recommendations of fixed indexed annuities.

Be careful of the numbers that you see on a proposal if you cannot also see what can be liquidated as cash on a year by year basis. There are different ways that some annuity companies structure surrender penalties that can be confusing. Figure your rate of return based on what is convertible to cash, not just the account value you see on a statement. Your actual rate of return is based on what you can liquidate as cash at any point in time. Example: A Fixed Indexed Annuity says it’s paying 6% simple interest. You put in $100,000. At the end of 10 years the account value shows $160,000. But it’s only worth closer to $120,000 if you choose to liquidate the account at one time, because of surrender penalties. If you want to make the 6% simple interest in this example you typically can only withdraw a small percentage each year of the contract value and keep the contract without surrendering it. So if you liquidated the annuity after 10 years at $120,000, the actual rate of return would be 2% not 6%.


Stay away from any and all salespeople who sell only one product like fixed indexed annuities as they tend to steer you towards only what they offer. Instead, look for a financial advisor who can offer you many different financial products along with fixed indexed annuities. This will enable you to build a diversified portfolio and to hedge against inflation. This can include: stocks; bonds; mutual funds; real estate; variable, fixed and fixed indexed annuities; commodities; gold and silver; commission free, fee based managed accounts; IRA’s and 401k rollovers; SIMPLE and SEP IRA accounts; etc.

For more information on fixed indexed annuities with many different guaranteed for life income options as part of an overall portfolio strategy, call me for a phone or in-office appointment. We will and are required to disclose all the costs, surrender penalties, and fees associated with annuities so you can make an educated choice if one should be part of your overall plan.