Saturday, April 23, 2005

Index Annuities

Index annuities are supposedly going to account for 50% of all annuity sales in the next year. Can you believe that? What is it about this annuity that has captivated the whole industry. Many types of annuities have come out in the past, but the index annuity has definitely been the one that has caught the most attention. So what is all the hype about?

Let me be the first to tell you that Index Annuities are not stock market alternatives. Nor are they designed to outperform the market. Index annuities are really designed to give you a little more potential than fixed annuities without the additional risk. The basic idea of an index annuity is to get a portion of the upside of the market and avoid the downside. It sounds too good to be true but it's really not. They don't give you all the upside and as a tradeoff you don't get the downside.

The problem with index annuities isn't the concept. It has boiled down to 1 of 2 things. First of all, there are agents that try to make them sound like the answer to all of your prayers. Well, some of them are good and have good features but they certainly have their limitations. Furthermore, some insurance companies give an unlimited upside the first year but bury information about how they are going to mitigate your gains later on in the contract years.

Perhaps the biggest problem with the index annuity is not the concept but how they are presented. First and foremost, if it is too good to be true, then it probably is. A good solid index annuity will give you good upside in the good years, protect you from the down years and lock in your gains every one to two years. Even in the contract, there may provisions built in to protect the insurance company, such as the ability to lower your upside, but don't let that scare you. A good company builds those in for the bad times and only lowers your upside potential if they absolutely have to. They do it for their protection AND FOR YOURS. The bad ones normally sound so good to lure you in and then lower your potential after the first year. These especially include the index annuities with huge upfront bonuses. So if it actually does sound to good to be true, then you may want to be extra careful. Good companies don't have to offer huge incentives or make it sound too good to be true to get you in.

As I always say, however, it is good to know what you are looking for before you go look for it. Do your due dilligence once you find it and make sure it fits your needs. Index annuities, the right ones, can be a great alternative to fixed annuities and CD's---but not for everyone. Always do your homework and know what you want and don't want and seek the help of a professional you can trust before making any decisions. Most importantly, please remember...

Ignorance is not bliss...

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