FIAs: Fact or Fiction

Fact or Fiction? The Truth about FIAs

As we forge full speed ahead in 2015, clients continue to look for workable strategies to bridge their retirement gaps and protect their financial futures. With the simplicity of self-education using the Internet, newspapers, magazines and word-of-mouth suggestions from friends and colleagues, clients may think they know the reality behind products they don’t truly understand. It’s imperative you, the producer, be prepared with the facts and have all the information you need to assist your clients when making retirement decisions.

A variety of press pieces have unfairly characterized and misrepresented fixed indexed annuities (FIAs). The authors have repeatedly compared FIAs to securities; however, FIAs should never be treated as, or compared to, risk-based investment products. FIAs do not involve investing in underlying markets and are not a securities product. Furthermore, fixed indexed annuity owners do not lose principal—including previously credited interest—due to market fluctuations.

No product is the one and only correct choice for people planning for retirement. Educated consumers will likely select a combination of products that may include a fixed indexed annuity. Now is the time to inform your clients, prospects and their families about the products available to meet their needs and remind them of the safety, tax deferral and lifetime income available from FIAs.

To help combat the false assumptions made about FIAs, NAFA released a summary of talking points producers can use. With the information summarized, you will be armed to tackle even the toughest questions and concerns brought up by clients and prospects about FIAs.

Surrender penalties are onerous, both in duration and amount. Surrender charges are both necessary and fair. Surrender charges cost the carrier money, and the surrender charge method only asks those customers who break the time commitment to bear the loss. Additionally, consumers have the ability to choose from a wide variety of products with different surrender periods in order to select the one that best fits their needs.
Bonus interest credits provide no real value to customers. Products with lower and shorter surrender charges often have no/lower bonuses. Conversely, products with higher and longer surrender charges are more likely to have higher bonuses. For a consumer who holds the annuity longer than the surrender charge period, the bonus annuity may result in more interest earned.
Fixed indexed annuities are overly complex. All fixed indexed annuities share the same basic framework: in periods (typically one year) during which the index declines, they protect principal and all previously credited interest from loss—the annuity owner earns zero interest. In periods where the index increases, they credit an interest rate, which is a simple calculation of the index increase. Annuity owners can quickly and easily calculate their own interest or view their annual report.
FIA performance is inferior to a portfolio consisting of 85% bank CDs and 15% in an S&P 500 index fund, taxable bond funds or 5‐year CDs. The underlying assumption of this statement is false because FIAs should not be considered investments nor should they be compared to risk-based investments. FIAs are not securities. According to the Wharton study previously mentioned, five-year returns from 1996 through 2003 show index annuity results were better than the S&P 500® index 66% of the time, and better than a 50-50% combination of one-year treasury bills and the S&P 500 Index 80% of the time.
FIA performance is inadequate because the caps are low and can change every year, and because they exclude the dividend yield. There are currently products with caps of 10.85% or more available, with caps having exceeded 20% in the past decade. Furthermore, there is no product anywhere that provides stock returns, including dividends, yet fully guarantees that the effect of a down year in the stock market will be immediately eliminated. Again, the risk-averse properties of FIAs may outweigh the benefit of dividend yield from other products.
The lifetime income feature is inferior to (or at least no better than) an immediate annuity. While an immediate annuity is an excellent consideration for someone who needs income today, consumers who prefer the option of having a choice for income if/when they need it may select a fixed deferred indexed annuity. The promise of guaranteed retirement income for life offers stability while allowing the consumer to maintain control of the asset. Many FIAs provide accumulation potential and continued access to most, if not all, of the initial premium through a guaranteed lifetime withdrawal or income benefit.
The tax-deferral aspect of FIAs is redundant for the 58% of buyers whose annuity is an IRA. The most important attraction of an FIA for both IRAs and non‐qualified funds is the zero percent interest rate floor that protects the money from market disasters or simple corrections. AFIA can make sense in an IRA for consumers who find characteristics such as the guaranteed lifetime withdrawal benefit or the index‐based interest crediting with guaranteed safety features appealing.
FIAs are sold in a deceptive manner. As FIAs have become more popular, insurance regulators and insurance carriers have consistently increased the effort put into ensuring that consumers understand the products they purchase and that agents are more likely than ever to follow a process that prevents unsuitable sales. According to the National Association of Insurance Commissioner’s Closed Complaint Database on annuities in 2009, there was an average of only 3.29 indexed annuity complaints per company, a number that has consecutively decreased since 2006.
FIAs pay unusually high commissions to sales agents that lead to abuses in the sales process. The state insurance departments’ standards for suitability determination leave no room for abuses resulting from commission‐driven sales. Additionally, all products have to cover the provider’s sales and marketing expenses. FIAs are comparable to fee‐based financial products over similar time horizons.
State insurance regulators inadequately regulate FIAs. If annuity owners have a problem with an insurance carrier or a producer, they can seek redress from a regulator who is charged with protecting all insurance customers in their home state and who holds the power to assess fines, revoke licenses and file criminal charges. Unlike security regulation, these individuals do not have to submit to a lengthy and costly mediation process.

*The information in this table has been summarized from NAFA’s “Response to ‘The Safety Trap’” Talking Points .


Annuities are long-term products of the insurance industry designed for retirement income. They contain some limitations, including possible withdrawal charges and a market value adjustment that could affect contract values. Guarantees provided by annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank or the FDIC. Bonus annuities may include lower caps, higher spreads or other restrictions that are not included in similar annuities that don’t offer a premium bonus feature.

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