Indexed Annuities Are…?
How Indexed Annuities Work
Indexed annuities were designed to give the individual investor a chance to do better, interest –wise, than the CD at the bank. Since interest rates have been so low, the actuaries (the guys that figure out the mathematical formulas inside insurance companies) came up with a way to give an investor a chance to do better, without risk to his or her principal.
Essentially the insurance carrier receives a deposit from an investor, takes that money and invests it into high grade corporate and government bonds, then they take some the interest from the bonds and buy options on the S & P. If the pricing is right at the end of the year, they exercise the options. There are a variety of caps and strategies that average out the gains on monthly basis, to determine how much they will pay the investor, if there is a gain.
If there is no gain, the options expire worthless and there is no credit to the account. The investor’s principal monies and whatever gains are made, on a yearly basis, are not at risk to market losses. The money deposited along with the gains made are not ever put into the market, rather they stay protected in the general fund of the insurance carrier.
Each anniversary of the contract, new options are purchased. If the S & P slipped down the year before, the investor should have a better chance to see a gain, as the options price is now lower and has a better chance of ending up the year “in the money”. This is never guaranteed.
Also the investor could use a fixed interest account, as an option with the FIA, and therefore would not participate in this indexing strategy.
Are Indexed Annuities (FIAs) as great as the advisors who sell them say they are?
When you enter the distribution phase, or the “I-need-income-from-my-money” phase of your life, without a plan that is designed through LIPP™, the Spend-down™ problem is now your biggest risk.
Indexed annuities or Fixed Indexed Annuities (FIA), used in the way that most advisors sell them, do not solve this critical issue, because it is simply sold as an alternative investment. Better crediting or not, if you live a long time, you are going to have an issue.
So the answer to above question is no.
Some FIAs have come out with an “income rider” as a response to the variable annuity (still insurance-based but with much higher fees and investment risk) industry’s invention of this rider. This rider promises to keep your annuity-based income continuing on for life.
If you can hold off in taking income, especially if you are still working, some have certain types of roll-ups, which can create a larger base from which to draw income out.
Income riders are better than not having them and are an improvement to the older- styled annuity, in some aspects. There are some contracts that are better than others.
But generally, if not used correctly and in certain circumstances, there are severe problems with income riders on the FIA, especially for older people who need income, within 1-3 years, from their money.
We’d be happy to provide you with an easy- to -read white-paper document that spells out 5 major pitfalls of the income rider.
Does LIPP™ use Indexed Annuities within the plan?
Generally yes, but not usually because of the indexing strategy per se. LIPP™ takes advantage of a more important income enhancement factor called Life Expectancy (LE) credits. While LE credits are hardly ever used by advisors (to their clients detriment), it is the most important planning tool in existence (even going back to Roman times) when the discussion of lifetime- income comes into play.
The Defined Benefit Corporate Pension Plans all use LE credits. Why shouldn’t you?
The only answer that we know of to answer this critical question is your advisor has never told you about LE credits and how to use them to your advantage… or they simply don’t know how to make the LE credits work for you.
LIPP™, making extensive use of LE credits, is your answer toward creating an income plan that you will not outlive.
LIPP™ uses only certain types of income riders and in certain situations. They are mostly not used, for a variety of reasons, as described in our white paper document.