Are You Limiting Your Clients’ Potential?


Are You Limiting Your Clients’ Potential?

At the moment, the average seven-year fixed annuity is yielding right around 2.5 percent. To CD consumers, this rate sounds surprisingly appealing. In my experience, I feel that far too many advisors and their clients set their eyes on a fixed, multi-year guarantee annuity as being the one and only alternative to CDs and/or other investment vehicles for money they want to keep protected. Fixed indexed annuities are overlooked, even though they provide the exact same principal protection while offering the potential for gains in the neighborhood of 5 percent.

Let’s look at some facts …

  • In the last 30 years, the S&P 500 has had positive growth 24 times 
  • Out of those 24 years, growth has been 5% or more 18 times
  • Conclusion: The S&P 500 has seen growth of 5% or more 18 out of the last 30 years (60%) – this is an important statistic, so please keep it in mind

A conservative consumer may feel comfortable earning a 2.5 percent fixed rate on their money for seven years. However, the facts above support an indexed annuity’s propensity to outperform a traditional fixed annuity over time. 

Here’s why: Assuming premium of $100,000, a traditional seven-year fixed annuity with an annual yield of 2.50 percent will result in an ending value of $118,869. No more, no less. Currently, our best seven-year fixed indexed annuity annual point-to-point cap (S&P 500) for a $100,000 premium is 5 percent. According to the facts stated earlier, the S&P 500 has seen growth of 5 percent or more 18 out of the last 30 years, which is 60 percent. 

So, if the seven-year indexed annuity lives up to expectations and performs at this 60 percent average, we’d be looking at hitting the 5 percent cap four out of seven years. This would equate to an ending value of $121,551 – earning the client an additional $2,600 more than the fixed annuity. 

Of course, we can’t guarantee the indexed annuity’s performance, but one argument for an indexed annuity over a fixed annuity is potential. If we hit the annual cap five out of seven years, this will result in an additional $8,700 more than the fixed annuity. Hitting the cap seven out of seven years will give them an additional $21,800. 

The Bottom Line: I challenge you to take the time to analyze the facts and benefits behind a fixed indexed annuity. If you aren’t talking about them with your clients, someone else will.