Why a Fixed Indexed Annuity Doesn’t Serve the Function of an Annuity

Published August 17, 2017
At first, fixed indexed annuities appear to offer the best of both worlds: a guaranteed income stream with simultaneous market exposure for that money to grow. But, these products come with high fees that significantly reduce their value. Here’s why.
  • Adding the potential upside benefit with market exposure to your annuity lowers the guaranteed income you’ll receive
  • There are many yearly fees associated with a fixed indexed annuity purchase

A fixed indexed annuity (FIA) is an insurance product which produces a pension-like guaranteed income in retirement while also offering a 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.

If an annuity is not able to provide you with the highest possible income, then it loses the value that an annuity can provide inside a well-diversified portfolio. Fixed indexed annuity sales have exploded in the last few years, but we believe that they don’t actually serve the proper function of an annuity and that there are better ways for Americans to prepare for retirement.

First, let’s define what a traditional annuity is, so we can see how a fixed indexed annuity differs from that.

An annuity is an insurance product which allows you to exchange a lump-sum amount for a stream of guaranteed payments in the future. The payments continue as long as you’re alive. Now, insurance companies will offer different features that make the guarantee better or customize it to your needs, but this is the basic function of an annuity.

Recently, the market has become saturated with annuities that also serve investing functions. They promise growth and a guaranteed stream of income. But like we’ve seen with adding riders on an immediate annuity or longevity annuity, the more features you add, the lower the guaranteed stream of income becomes.

When you add the upside potential benefit to your annuity, it’s a major addition and therefore lowers the amount of guaranteed income you’ll receive. Although you’ll receive some of the growth that is generated from the premium, it’s not a large portion because insurance companies will limit the amount you can benefit through a number of ways. Additionally, because this is a complicated product that requires investment management, you are charged high fees, which reduce the amount of income your savings could generate.

Lauren Minches

Lauren Minches

Financial Planning Professional

Lauren is an actuary by training with expertise in retirement, finance, and risk. She writes about annuities to make them easier to understand and evaluate. Her goal is to help people create retirements with more time for living and less time thinking about money.