4 Reasons Not to Buy a Fixed Indexed Annuity
A fixed indexed annuity (FIA) is an insurance product which produces a pension-like guaranteed income in retirement while also offering some liquidity and the opportunity to benefit from market growth. This product sounds like the best of both worlds — an income which doesn’t stop and the ability for that money to grow, as it would in the market. But, the insurance companies and brokers sell them for very high fees with lots of caveats, which significantly reduce the value that you could receive from your retirement savings.
There are at least 4 reasons not to purchase a fixed indexed annuity.
Insurer ratings tend to be lower.
Income annuity providers generally have higher ratings than fixed indexed annuity providers. There are actually no FIA providers with an A++ rating. The leading underwriter is Allianz, with an A+ from AM Best.
Longevity annuities and the Personal Pension generate better income.
Enrolling in the Personal Pension or purchasing a longevity annuity will generate the same guaranteed income for a much lower premium. Also, the lifetime income stream can’t be taken away from you if you have to withdraw some money earlier. You can use our Diagnostic Tool, which will project your income needs in retirement based on some basic information, and suggest funding plans that are within your means..
Your market growth is limited.
Participation rates and caps limit how much of your money in a fixed indexed annuity can grow. It’s better to put your money not used to purchase an income annuity in funds with low fees that won’t limit how much of the growth you can benefit from.
The Department of Labor is discouraging fixed indexed annuity purchases.
The Department of Labor reformed the fiduciary rules to discourage indexed annuity sales, while making the process more simple for income annuities and fixed rate annuities.
If you don’t look too carefully, fixed indexed annuities are a great sell — market upside with no downside. But this high guarantee comes at a high cost that’s actually draining the money that you could be spending and investing else where for a more financially secure future.
There’s a lot of appeal to the marketing message for Fixed Indexed Annuities — market upside with no downside. But here’s the reality — if you want market upside, be in the market with low-cost index funds or mutual funds. If you want protection from market downturns, supplement the market part of your portfolio with simple income annuities. Don’t try to do everything with one product because you’ll end up with a product that doesn’t do anything well and is most likely relatively expensive.