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Retirement Planning Question – Index Annuity

 

Q:  Wes, I was listening to your show on Feb. 17th on WSB radio. You were addressing a question regarding investing in an Index Annuity – the Cap Rates vs Actual Returns, and why it may not be a good idea. I was traveling and began losing the broadcast around Columbus, GA. Would you mind answering that again for me?

 

A:  Wes was talking about a Fixed Indexed Annuity. They are insurance products, not investment products; even though they aren’t marketed that way. They offer “market-linked” returns with zero downside – which is only possible because they are really just single premium life insurance policies with a semi-variable crediting rate. So in order to arrive at your “market-linked” return, they have a bevy of different formulas designed to prevent you from every really capturing all of the upside in a bull market (month-to-month caps, for example… where your max monthly return is 0.50% or 6% annually, for example… but the variability of the stock market’s returns guarantees you never really capture 6% because never is the market positive 12 consecutive months). They also generally have very long lock-up periods and huge surrender fees – so there’s an illiquidity issue and absolutely no illiquidity premium to the product. 

 

Hope this helps to clarify. 


 

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