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The Pros & Cons of Index Annuities

The world of annuities can be very confusing to most people.  I personally do not blame that confusion on those who are investigating this great addition to their portfolios.  I blame the professionals that make it confusing to those that are seeking the information.  Annuities, especially Fixed Indexed Annuities, are amazingly easy to understand.   

There are approximately 200 different annuity companies in the marketplace.  Each one of those annuity companies have anywhere from 5-20 different annuities, and each of those annuities can come with different sub-categories and options.  So, on the low end that is 1,000 different annuities that you can choose from.   How are you supposed to know which annuity is right for you?

To start, this is why it’s important that you deal with an annuity expert.  Meaning, someone who only deals in annuities and safe-money products.  I am not securities licensed.  I am not a CPA.  I am not an attorney.  I know a lot about these different areas, but the rules change so often that I could never be proficient in all of them.  And it is no different than going to a CFP, a CPA, or an attorney and asking them about the subject of annuities.  I am sure they know about them, but not to the extent that an expert who only deals with annuities will know.  I am an advocate of having a separate person in each one of these categories who is an expert.

Today, I would like to give you a list of the pros and cons of Index annuities so you will know for yourself what is hype, and what is the actual truth about these products.  


For further information on the other types of annuities, please reference my “Annuity Atlas” guide and my “Truth About Variable Annuities” guide.  Also, please call me directly with any questions, or to discuss your desired outcomes for your personal wealth accumulation and retirement plans so we can pinpoint the perfect safe-money strategy for you.

Pros of Index Annuities
  • No active management or repetitive meetings with financial planners.
  • Automatic Pilot.  Set it and forget it.  This feature helps with personal or family concerns of cognitive decline in elder years.
  • Zero fees.  A great amount of your hard-earned money gets eaten up with active management fees and fund fees.
  • Backed by huge insurance companies that have multiple layers of safety that protects your money, even in the event of a default.  Life Insurance Companies have stood the test of time through devastating world wars, financial recessions and depressions, sweeping epidemics and pandemics, earthquakes, fires, inflation, and deflation.  They should not be confused with P&C, or Property & Casualty Insurance Companies.  Life Insurance Companies do not just close their doors and go out of business declaring all policies null and void.  It just does not happen. 
  • Potential for market-like returns without the risk of having your money invested directly in the market.
  • Never lose money due to a market downturn.  Your money is completely protected from market volatility, and your gains are always locked in.
  • Historically, FIA’s have had better returns that long-term government bonds.  Considering bond yields are at a historic low, this is very important point to consider.
  • Avoids probate with the naming of a direct beneficiary.
  • Tax-deferred.
  • Can be set up to provide lifetime income for you and your spouse and possible Long-Term Care benefits with an added rider (normally comes with a small fee depending on the terms.  However, there are zero fee options)
  • 100% of your money can become liquid in the event of a death, a terminal illness diagnosis, or confinement to a Long-Term Care facility.
  • Access to a portion of your money during your agreement that can be used for emergencies or a custom designed strategy for income.
  • 100% of your money is eligible for interest gains from day one.  No front-load fees and the agent’s commission is paid from the annuity company’s general fund.  Nothing comes out of your pocket.
  • Potential for an upfront bonus.
  • Some Index Annuities can be designed to pass a larger death benefit to loved ones if you do not qualify for traditional life insurance.
Cons of Index Annuities
  • Surrender Charges.  An annuity agreement comes with a declining surrender schedule.  The way your money is protected by the annuity company is making investments in long-term bonds that have their own surrender schedules.  So, if you change your mind and decide to pull your money out of the annuity before the agreed upon time, the annuity company must pay a surrender charge to liquidate the bond and that gets passed on to you.
  • Limited Growth.  Interest is credited in one of the three way – caps, spreads, and participation rates.  If you choose an index with a cap, there is a ceiling on how much you can earn no matter how well the index performs.  You are much better off sticking with a participation rate.  The volatility of the index you choose will directly affect the participation rate you receive.  For example, the S&P 500 is extremely volatile, so you will receive a lower participation rate.  There are many indexes to choose from, and there are several that will give you higher than a 100% participation rate.
  • Limited Access.  Typically, you have access of up to 10% per year of the overall account value in your annuity, and that includes any gains you have made.  For this reason, it is vitally important to work with an expert and have a strategy to make sure this adds to your financial plan, not hinders it. 

Discover How Real People Successfully Use Index Annuities In Retirement

I wrote this 100% FREE guide to help you understand how to use annuities to get the most money while protecting your assets in retirement.

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