Let’s look at that. Index Annuities are technically a form of a fixed annuity so are not regulated by the securities (investments) regulators like FINRA. They are insurance products.
The pitch goes like this. “Your money is guaranteed never to decrease due to market fluctuations and can even increase if the market goes up.”
Actually I like these products until they add the GMWB lifetime income rider. Because this is an insurance product the fee for the index annuity itself can be told to the public as zero. The crediting process is beyond the scope of this post but if the market (such as measured by the S&P 500 goes up over the year (or month or whatever you choose) your account gains a percentage of the gain, up to a cap, or less a spread. Everything’s pretty plain so far.
Then they add a lifetime income rider. A rider on an insurance product costs money. Now watch this. “Oh the cost is .95% per year. ” A true statement. It is .95% of the income base and charged against the account value. “And the income base has an annual 7% step up.” That means the income base (not real money) not your account value, goes up 7%. Well, what else goes up 7%? If you guessed the fee you are right. It is still .95% of the income base. True.
Nobody’s lied yet, but nobody’s told the truth yet either.
If your account value, that has a cap doesn’t keep up with the income base, the .95% of the income base is an increasing percentage of your account value. And by the way, the money is taken out of your account value which makes it hard to keep up. Over a ten year period this can get HUGE. Soon the fee is cannibalizing your account value. Have no fear. “Your income is guaranteed for life.” Well most of it is. Once the account value goes to zero the income may fall. Even the caps and spreads are probably not guaranteed. Way to destroy generational wealth!
And once you get on this slide, getting out takes a beating.