Written by Aaron R. Winston
Last Updated: September 27, 2023 7:16am CDT
Claim: The primary benefit of fixed index annuities is growing your money.
Claimed By: AnnuityAdvantage
The claim made by AnnuityAdvantage that the primary benefit of a consumer purchasing a fixed index annuity (FIA) is to grow their money is false. The statement is inaccurate because it would be ill-advised to buy this type of annuity to grow one’s wealth and become more affluent.
It is a bad deal if the investor’s primary goal is to increase their wealth. For instance, if a healthy 30-year-old seeks to grow their net worth by saving money each month, purchasing a fixed index annuity will not likely accomplish that.
The primary purpose of a fixed index annuity is to guarantee future income and provide a return, generally less than the rate of inflation. The guarantee of not losing money when the market goes down comes at a significant price.
Index annuities that credit return tied to the S&P 500 index calculate the change in the price of the S&P 500, often on an average month to month or year to year. The dividends of the S&P 500 are not given to the policyholder, and often, there are caps on the returns.
If the S&P 500 change in value goes up 10%, there is a much lower cap or restrictive participation percent on what the policyholder actually receives.
Furthering this point, when it comes to taking income from the index annuity, the income is quoted at an attractive 7.50%! What is not disclosed is that a portion of the 7.50% is the return of the principal.
The initial investment is not guaranteed to remain once the owner starts taking an income. Only the income is guaranteed. What remains for beneficiaries could be significantly less or none at all.
The following can be a helpful way to think of it: The essence of these annuity plans is to ensure that the individual and/or their spouse will continue to have a stream of income later in life, which is the inverse of a life insurance policy that involves the insurance companies’ actuaries estimating when they think the beneficiary will die.
Unlike life insurance, people who purchase fixed index annuities will benefit more when they live a long time.
It ends up extra worthwhile for the life insurance policyholder when they pass away much earlier than expected since the beneficiaries will get a payout while they make fewer monthly premium payments.
In summary, the primary benefit of a fixed index annuity is not to grow your money to any significant extent. Instead, it is an insurance contract to guarantee future income.
Fact Check By: Express Legal Funding
About the Author
Aaron Winston is the Strategy Director of Express Legal Funding. As "The Legal Funding Expert," Aaron has more than ten years of experience in the consumer finance industry. Most of which was as a consultant to a top financial advisory firm, managing 400+ million USD in client wealth. He is recognized as an expert author and researcher across multiple SEO industries.
Aaron Winston earned his title "The Legal Funding Expert" through authoritative articles and blog posts about legal funding. He specializes in expert content writing for pre-settlement funding and law firm blogs.
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Aaron was born in Lubbock, TX, where he spent the first eight years of his life. Aaron attended Akiba Academy of Dallas, TX.