Case Study: Fixed Annuity Confusion

Annuities are Life Insurance Company Products - Client Case Study

An Annuity is a life Insurance company's product that can offer guarantees for your funds/premium contributions. So, when it comes to annuity decisions, having a trusted resource like LifeInsuranceReview.com (LIR) can make all the difference. The financial landscape is complex, and many products—particularly fixed index annuities—are marketed in ways that can confuse even the most diligent consumers. Here’s why seeking a second opinion with LIR is essential, especially during the free-look period of a new policy.

The Impact of High Interest Rates on Insurance Products

High interest rates create a favorable environment for purchasing life insurance products. Similar to how banks offer higher rates on CDs during such times, life insurance companies pass on their higher returns to policyholders. This benefit extends to annuities, which are also issued by life insurance companies.

At LifeInsuranceReview.com, we’re equipped to analyze fixed annuities, fixed index annuities, variable annuities, and even the new registered index-linked annuities (RILAs). As FINRA-registered, we bring a level of expertise that ensures you’re making the most informed decisions to explore all of your options and NOT BE SOLD by biased recommendations.

Unveiling the Complexity of Fixed Index Annuities

One of the most widely promoted annuity products today is the fixed index annuity (FIA). These are often marketed through seminars and media ads that promise lucrative benefits. However, many FIAs come with hidden complexities and potential drawbacks. Here are some key points to consider:

• Too Good to Be True: The attractive features of FIAs often sound better than they are, leaving consumers with unrealistic expectations.

• High Commissions: Agents and brokers can earn upfront commissions as high as 8%, not including additional bonuses and sales incentives.

• Consumer Confusion: Many buyers don’t fully understand what there're being told and sold. When we ask clients to explain their annuities, there is often a significant disconnect between what they were told and what the product actually entails.

The Three Values of an Annuity

A major source of confusion lies in the three different values associated with annuities:

1. Account Value: The actual cash value in the annuity.

2. Income Value: The amount used to calculate guaranteed income payments.

3. Death Benefit Value: The amount paid to beneficiaries upon the annuitant’s death.

These values often go by various names, such as “protective value” or “guaranteed value,” further complicating matters. Add to this the various riders and features of specific annuities, and it’s clear why professional guidance is critical.

Why Work with LifeInsuranceReview.com?

When choosing between fiduciaries like LIR and traditional salespeople or advisors, the difference is clear:

• Transparency: We prioritize educating clients about the products they’re considering or already own.

• Unbiased Review: Unlike sales-focused agents/brokers/financial advisors, we are registered fiduciaries and analyst.

• Focus on Details: We delve into the fine print, review the illustrations and policy, ensuring you understand the nuances of surrender charges, rates, and cost structures.

The Importance of the Free-Look Period

Every new annuity or life insurance policy comes with a free-look period, typically ranging from 10 to 30 days. During this time, you can cancel the policy without incurring surrender charges.

Unlike cash value life insurance, where surrender charges are tied to annual premiums, annuities calculate surrender charges on the entire premium—a much larger amount. This underscores the importance of seeking a second opinion before the free-look period expires.

Case Study: Fixed Index Annuity Misunderstandings

A recent case involved a senior client who was being sold a fixed index annuity based on promises of guaranteed returns and low risk. Upon review, we found that:

• The client misunderstood the income value, mistakenly believing it was the same as the account value and fully accessible for regular withdrawals.

• While the annuity included rider fees, it did not guarantee any growth or deliver the growth that had been illustrated to the client during the sales process.

• The client was unaware of the impact of the surrender charge period, which negatively affected her ability grow her account as illustrated. This misunderstanding impacted both her actual account value and income value, significantly limiting the annuity's Internal Rate of Return (IRR).

Case Study: Fixed Annuity Confusion

Just some of the Illustration pages to highlight the complexities, and why it's important to work with a fiduciary to help you better understand them.

Shows the base guaranteed of the annuity policy value and the income value.

Shows the CURRENT crediting rates, these rates will not be the same for the life of the annuity.

This is ASSUMING 5% annually a year return, apply ONLY the current rates.

Showing Guaranteed vs Non-Guaranteed returns, applying the current rates, but rates can change the following years of the annuity policy.

By working with LIR, the client was able to not go through with the annuity purchased and explore better alternatives tailored to her needs.

Key Takeaway - Case Study: Fixed Annuity Confusion

Choosing the right annuity product requires more than a persuasive sales pitch. It demands a comprehensive understanding of the product’s intricacies and what trade-off are there compare to other options. At Life Insurance Review, we’re dedicated to being on the side of the consumer, providing unbiased council and empowering you to make informed decisions. Whether you’re shopping for an annuity or seeking a second opinion, trust LIR to guide you every step of the way.