It is finally time to think summer. While I'd bet you're not planning to learn about complex fixed index annuities while relaxing at the beach or sitting poolside, I hope to change that. With low interest rates expected to continue for an extended time, it is certainly worth learning more about index annuity products that promise a guarantee of principal and a potential for market-linked growth. Just like picking the best beach makes your summer better, gaining a balanced perspective versus the fixed index annuity sales pitch can help make your investment life better. As such, I've compiled six quick reads that you can finish before your sunscreen wears off. 

Growth of Fixed-Index Annuities

Fixed-index annuities (aka: indexed annuities, hybrids, equity-indexed annuities) have grown in popularity appealing to investors seeking balance, safety and growth potential. In fact, indexed annuities sales grew by 17%, representing 46.3% of all fixed annuities sold in 2013. The numbers demonstrate that the promise of low risk growth is resonating with many baby boomers who are preparing for or already in retirement. Yet, we all know that there is no such thing as a free lunch. Don't simply take our word for it – please read what others are saying.

FI Annuity Reading List

Click the titles for links to the full articles. Happy summer and happy reading!

Equity-Indexed Annuity (The Bogleheads® Wiki)

Equity-indexed annuities are strongly not recommended for most investors. Interest paid by EIAs is not calculated with the usual formulas for calculating interest. EIA interest crediting methods are complex and have several moving parts. This makes it impossible to know at the time of purchase, how much interest, if any, you will get from the annuity. The surrender fees can have a significant impact.

Indexed Annuities Cap Gains, Obscure Fees as Sellers Earn Trip to Disney (Bloomberg)

“These contracts have really high hidden fees,” said Smetters, a former U.S. Treasury Department economic policy official. “That’s why they’re terrible ideas for older people even though they’re peddled to them.”

Salespeople typically downplay the complexity of indexed annuities and their long lock-up periods, said Barbara Roper, director of investor protection for the Consumer Federation of America, a Washington-based lobbying group. The contracts are “one of the most abusively sold products on the market today,” said Roper.

Index Annuities Are A Safety Trap (Money Magazine)

According to William Reichenstein, an investment management professor at Baylor University, over the long term a very conservative portfolio easily beats an index annuity. “”These are very seductive products, marketed very effectively,”” he says, “”but they almost always underperform.””

Confessions of an Indexed-Annuity Insider (MarketWatch)

Most people think that the agents are slaves to the carriers. It's actually the other way around. The agents really run the show. The longer the surrender charge period, the higher the commission paid to the agent, and carriers know that agents are going to gravitate to high commissions … so that's the products they give them.

Equity-Indexed Annuities—A Complex Choice (FINRA Investor Alert)

Your guaranteed return is only as good as the insurance company that gives it. While it is not a common occurrence that a life insurance company is unable to meet its obligations, it happens.

Don't Buy Index Annuities (Reuters)

Index annuities are technically an insurance product, which means that you can sell them with nothing but an insurance license — even if FINRA has torn up your securities license. That’s no mere theoretical problem: more than a third of all brokers of insurance annuities in Florida and Massachusetts have had their securities licenses revoked.

I hope that these articles help you make an informed decision regarding your investments.


Did you find these articles informative and helpful? If you'd like to suggest any other articles that were not included, please post in the comments section.

“”Beach Reading”” by aafromaa is licensed under CC BY 2.0