The Good, The Bad and The Ugly of Annuities

Over the years, I have had clients contact me about an opportunity they have received for a fixed indexed annuity. These annuities are heavily marketed by mail, radio programs, and through free seminars at steak houses as the one-size-fits-all financial product for retirement income. There are important things to know about fixed indexed annuities before investing in them. I am not against all fixed indexed annuities, but there are aspects of fixed index annuities that concern me.

The Good

Many offer a guaranteed minimum income for life based on the claims paying ability of the insurance company. They may produce a better rate of return than today’s certificate of deposit and savings rates.

The Bad

Large surrender penalties apply for early withdrawals. In some cases, these penalties may last up to 15 years or even a lifetime. Because of low cap rates today and returns, they very seldom keep up with inflation which deteriorates purchasing power over the long term.

The Ugly

There is very little oversight for salespeople who only deal in fixed indexed annuities. This is not true of someone licensed to offer securities (stocks, bonds and mutual funds) in addition to fixed indexed annuities, and why some annuity only sales people may choose not to become securities licensed. Working with someone who is licensed for more than annuities ensures their full understanding of the rules and regulations regarding the recommendations of fixed indexed annuities.

Be careful of the numbers that you see on a proposal if you cannot also see what can be liquidated as cash on a year by year basis. There are different ways that some annuity companies structure surrender penalties that can be very confusing. Your actual rate of return is based on what you can liquidate as cash at any point in time, not just what is on a statement and if you are in a long surrender period and want to liquidate, this will diminish the “return”.


Stay away from salespeople who sell only one product like fixed indexed annuities as they tend to steer you toward only what they offer. Instead, look for a financial advisor who can offer you many different financial products as well as fixed indexed annuities. This will enable you to build a diversified portfolio and to hedge against inflation. This can include: stocks; bonds; mutual funds; real estate; variable, fixed and fixed indexed annuities; commodities; gold and silver; commission free, fee based managed accounts; IRA’s and 401k rollovers; SIMPLE and SEP IRA accounts; etc.

For more information on fixed indexed annuities as part of an overall portfolio strategy, call us at 830-609-6986 for a phone or in-office appointment. We will disclose all the costs, surrender penalties, and fees associated with annuities so you can make an educated choice if one should be part of your overall plan.