Indexed Annuities – Pros and Cons

Hi Roger,

Thank you for taking the time to reply to my comments.

I’m glad to hear that you “use the services of a few trusted insurance agents… [who] are competent, qualified professionals whose knowledge and integrity benefit our mutual clients.”

Have you discussed fixed index annuities with them? I’m just curious. Since they are trustworthy, perhaps they could show you some successful examples.

One thing that should be discussed is income riders, or Guaranteed Minimum Income Benefits, that have become very popular. These riders GUARANTEE a specific lifetime payment you would receive in each year of the product, WITHOUT annuitizing the contract. Yes, there is an annual fee charged for this rider, usually .5 – 1.25%. It’s critical to understand that this fee is charged from the accumulation value, not the “benefit base” which makes up the rider.

So, here’s an example:

A 58-year old worker plans to work until age 70. He has seen his IRA rise and fall over the years, and it has caused a great deal of stress.

He KNOWS that the money in this IRA will be used for income. He will need it, in addition to his (deferred) social security income to maintain his standard of living.

He puts $100,000 into a fixed index annuity with a GMIB rider. Immediately, he receives a 15% bonus. His “benefit base” is now $115,000. Moreover, he will earn 8% “roll-up” or simple interest each year for 12 years. Every single year for 12 years, $9,200 is added to his benefit base. After 12 years, his benefit base is guaranteed to be $225,400.

(Please keep in mind, this is the BENEFIT BASE, not the accumulation account. He can’t just take out this $225,400. It forms the basis of his lifetime benefit.)

At 70, he begins taking his lifetime income of $11,834 yearly. (This is 5.25% of the benefit base at that time. It is 11.83% of his initial premium.)

The years go by, when he is 89 he has taken all $225,400 of the benefit base. Nevertheless, it continues for as long as he lives.

This example is based on an actual product on the market. (I can provide the illustration if you care to see it.)

Are there trade offs? Yes, of course.

If he decides he doesn’t want the contract any more and wants to cancel in year 2, there are penalties! Over time, the fee for the income benefit rider reduces the accumulation value. The “guaranteed” values on the accumulation side are ugly, but you have to understand what’s going on. There are fees coming out for the income rider (in this case .85% annually) and 0% assumed annual stock market growth!

I think this is a very good product for someone sick of the market roller coaster and wanting to have safe, guaranteed growth until retirement, followed by guaranteed lifetime distribution upon retirement.

If you think this is a terrible scheme hatched to enrich insurance companies and agents, please let me know what solution you would suggest in this situation.


James Mahaffey


Originally posted at

→ Save time. Save paperwork. Save dollars. Esurance ←