Ibbotson: Fixed Indexed Annuities Beat Out Bonds

Ibbotson: Fixed Indexed Annuities Beat Out Bonds

March 20, 2018

In his latest research, economist Roger Ibbotson argues that fixed indexed annuities have the potential to outperform bonds in the near future and smooth the return pattern of a portfolio. Click this link for the full article.

On the same note, Warren Buffett recently said: "it's a terrible mistake for long-term investors to be in bonds." Click this link for the full article.

There are many variations of Fixed Indexed Annuities (FIA) on the market depending on what your objective is. An FIA is an insurance contract unlike a VA (variable annuity) which is a security. With an FIA the insurance company assumes the risk whereas with a VA you assume the risk. Many FIA's have several indexing options including cap rates, (monthly or annual) limiting how much you can make on the upside but at the same time protect your principal on the downside.

But there are also participation rates with a spread that have NO cap on the upside. So this means if your participation rate is 100% then you get 100% of what the index does from anniversary date to anniversary date minus the spread with NO risk to your principal. The spread is never taken from the original principal or a contract value that has been locked in. Here are a couple of examples below.

1. A 175% participation rate in the S&P 500 Dividend Aristocrats Daily Risk Control 5% Index. This index option locks in gains every other year though there are other index options that lock in gains annually. 

2. A 180% participation rate in the J.P Morgan Mozaic II index with a 1% spread automatically locked in every three years but you can manually lock in an index value one time anytime you wish during any three year period.  

Some of these contracts earned as much as 15% in 2017 and this was achieved with NO risk to the principal since you only participate in good years but never participate in a bad year. Contact my office for more information.