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Do Fixed Indexed Annuities Cost More Than Other Fixed Income Annuities?

March 1, 2019 • Page 7 of 7

7. Though many FIAs have additional policy components that increase the complexity of the product, such as nursing home care benefit, and the potential growth of account value according to certain investment index options, these components do not serve to affect the lifetime income benefit that is fixed at the outset of the policy and is guaranteed, as long as the lifetime income provision is included in the policy as the prototype FIA in this paper.

8. Since annuity costs are difficult to ascertain, looking to the benefits offered seems to be a better way for assessing the value of an annuity because they are readily ascertainable.

9. The data in this paper also suggest that it is beneficial to plan for retirement income earlier rather than later, as the cost for secure, guaranteed income may be lower than it would be otherwise.

V. Conclusion

The common belief that FIAs are more costly than DIAs and SPIAs has not borne out in a comparative study of the income benefits of these annuities. While DIAs and SPIAs have low sales commissions and no surrender charges, they are not necessarily cheaper products as they in fact offer lower benefits, given the same investment. Conversely, FIAs offer higher benefits despite the fact that they may entail surrender charges and high sales costs.

It is therefore critical for advisors to understand the true benefit of each type of annuity by going beyond the issue of cost. Relying on common beliefs in dealing with the income needs of clients may be detrimental to their interests if such common beliefs turn out to be invalid.

Eva L. Levine, J.D., CFP, RIA, is the principal of Plenaris Advisory, based in San Jose, Calif. The firm offers comprehensive financial planning in the San Francisco Bay Area.

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elevine 5 years ago

TO: Jeff McClure Thank you for your comments. Here is my response to the issues you raised. 1. The data for the FIA in the paper did come from an actual policy. I can send you the illustration if you are interested. 2 The paper is not meant to show that ALL FIAs pay more than other income annuities. There are indeed variations in benefits offered by different insurance companies. Another advisor may choose to use different products for comparison. Iâ€™m an independent advisor, and have access to many FIAs with the highest income benefits on the market. It is possible that some FIAs have lower benefits than comparable DIAs and SPIAs. Thatâ€™s why I state in the paper that advisors should understand the â€˜true benefitsâ€™ of a policy that they recommend to clients. 3 The purpose of the paper is to point out that FIAs do not categorically cost more with less benefits than DIAs and SPIAs, as it is commonly believed. 4 The focus of the paper is on income benefit. If FIAs are properly used for retirement income, clients can expect to get the specified lifetime income benefit from the policy. The client who bought this FIA policy and who went through all the contract provisions with me understood that she would get the specified payout as â€˜guaranteed lifetime income benefitâ€™ under the lifetime income benefit rider if she followed the terms of the contract without using the policy for other purposes. 5 Your comment that the fine print in a policy may allow insurance companies to make changes is generally true as insurance companies always reserve the right to make policy changes due to expenses or other reasons. However, it is important to note that such changes may not have any impact on the fundamental income benefit that is guaranteed under the lifetime benefit rider that is part of the FIA policy I used for this paper, unless the owner/annuitant deviates from the basic provisions for the benefits. This is why itâ€™s important for advisors to understand all the terms and the benefits of a policy that they recommend to clients. 6 You indicate that the benefit payout may change over time due to company adjustments on expenses. For this FIA and many FIAs currently on the market, the benefit payout is fixed for the life of the policy at the outset. It is because these FIAs determine the payout amount according to the bonus interest or â€˜roll upâ€™ account, which has a fixed rate and which is by and large not affected by the accumulation value based on index growth or policy changes due to company expenses or other reasons. 7 FIAs appear to be complex. However, if they are used primarily for retirement income purposes, the focus should be on the income benefit that is fixed and ascertainable at the outset, rather than the potential accumulation due to certain index growth, which is very limited and unreliable. A critical problem with FIA is that it is presented as both an income as well as an accumulation vehicle. Personally, I would not consider or use FIAs as a vehicle for accumulation. Thanks again for your comments. Eva L. Levine
Jeff McClure 5 years ago

It is interesting that you have no references or other citations. Are your figures from a sales proposal or actual results from annuity payouts? I have been in the business of providing investment advice for 36 years and have found an astonishing difference between the sales proposals provided by annuity companies and the actual payouts over the decades. Buried in the fine print in the contract one will commonly find escape clauses that allow the insurance company to adjust expenses and those make a huge difference.