Fixed Indexed Annuities – Look before you Leap

Once the stock market goes down, especially in a correction, the fixed indexed annuity salesman come out of the woodwork.  The salesman promise both principal protection and investment growth with the purchase of what is called a fixed indexed annuity.  But at today’s annuity benefits, this is very hard to achieve.

What is a fixed indexed annuity

A fixed indexed annuity is a contract issued and guaranteed by an insurer, where you invest your premium dollars for protection against down markets, with the potential for some investment growth.   Your funds are linked to a stock index (usually the S&P 500).  What the insurer does is buy call options on that index so that if the index increases in value the call options may also increase in value.  The maximum amount you may earn may be limited, however, to what the insurance industry refers to as a Cap, or in other cases, a Participation Rate.

Unfortunately, the insurance companies over the last number of years dropped the cap rate, for example, or maximum amount of money you can make on a fixed index annuity, so much so that returns are severely limited.  For example, if the  index tracked the S&P 500 which had a 15% rate of return for a particular year, and the cap on the indexed annuity was 3%, you would only earn 3%.   Thus with today’s caps it is impossible to earn in your account the same amount as the market’s return.

Caps have come down in recent years so that in reality fixed indexed annuities are not really  a stock market substitute, but perhaps a bond market substitute.

Costs and Surrender Fees and Principal Risk

Fixed indexed annuities do not as a rule have up-front sales charges but they do have significant surrender charges, which are fees you must pay if you surrender the contract early, as well as other hidden costs.

Thus in spite of insurance industry advertising, you can lose principal value if you surrender the policy with a surrender fee is charged to your account.

For more information, refer to a recent Fidelity Investment Article:


Additional information can be found at FINRA’s website on indexed annuities:


Free Consultation

Please feel free to contact me for a free review or evaluation of any annuity you own or are thinking of buying, at 303-457-9500.   James H. Morgan, CFP, JD.

Or, if you feel you have been the victim of insurance or securities fraud or misrepresentation, please also feel free to call me for a free consultation, at 303-457-9500.

This is not to say that fixed indexed annuities do not have value. They may have a place in some portfolios.   Insurers like Allianz, Transamerica, Prudential, AIG, Lincoln and  Jackson Life and Annuity, offer competitive products for the right situation.

Fee only Planning

James Morgan Asset Management, LLC, offers fee  only financial planning and money management.  We do not earn a commission on any investment recommendation.

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