Are Indexed Annuities bad products?
Recently, some articles have called Indexed Annuities “terrible ideas” for senior citizens. Proponents disagree and feel these are the perfect solution for people who need market returns but don’t want to take market risk. Click here to read a Bloomberg article on this topic.
First, a primer…an Indexed Annuity is a type of deferred annuity. In theory, the purchaser gets to put their money in the stock market, realize some of the gains as the market goes up, but not lose money when the market goes down. As pointed out in the article above, some of the problems with these products include high fees, long surrender periods, lack of dividend participation, limits on the participation the annuity owner gets when the market does well, their complex structure, lack of oversight and aggressive sales techniques.
Proponents of indexed annuities counter that these are great products due to their downside protection in bad markets and guaranteed returns regardless of market conditions. In addition, the long surrender charges reinforce the long term nature of the consumers’ initial purchase decision. Lastly, proponents say that these types of analysis are based on poorly designed contracts and the consumer can do better than the “average” or “typical” contract.
The question for the individual, then, is who is right. Like all other financial and insurance products, indexed annuities work well for some people but very badly for others. These are very complex products as evidenced by the page after page of term definitions, multiple account balances and the overall length of the contract itself, and most people don’t have the background to understand all the implications of the fine print. Therein lay the problems…where do you fall and who can you trust to help with your decision process?
The only way to know if the product works for you is to have a Fee-Only (not fee-based) independent professional who understands your specific needs go through the details of the contract terms. You need to pay for this service, but the money you save by avoiding a bad contract, even if an indexed annuity in general is right for you, will pay for itself many times over.