South Florida Sun-Sentinel (Sunday)
Not all annuities are created equal
I recently met with a client to review an index annuity he acquired based on my recommendation 10 years earlier. The annuity I recommended would gain interest based on a percentage of the returns of the S&P 500 index with full principal protection and no investment risk. After 10 years, his initial $150,000 deposit had grown to more than $353,000. His account had a 10-year annualized return of 8.1 percent. That’s a very attractive return for an investment with no risk.
However, my client admitted to me, a week after he acquired the annuity from me, another adviser convinced him to put $150,000 in an index annuity with a different insurance company and different terms. (He told me not to be upset because we had just started working together and we weren’t “going steady” yet.) This annuity offered principal protection as well as a bonus. The annuity credited interest each year based on the S&P 500 but with a 5 percent cap. This means the most he could make
in the up years was 5 percent with a zero floor in the down years. Not surprisingly his annuity only grew to
$235,000 after 10 years, which is a
4.2 percent annualized return.
Two different 10-year index annuities, during essentially the same time period, had vastly different outcomes. I try to educate consumers who are considering owning an index annuity to understand the different interest crediting methods in order to select the contract with the best growth potential. Unfortunately, there are some inferior products being marketed by insurance companies, and many advisers seem incapable of identifying products that have the highest growth potential for their clients.
There are currently hundreds of index annuities being offered by major insurance companies, but there are three to four contracts on the market today that I believe have a much higher expected return than the rest of the pack. These are the only contracts we are recommending at this time for conservative growth and income.