ArcaMax

The promises are enticing: stock market upside with no risk on the downside. Or market “participation” with downside “protection.” File this under too good to be true. As with all sales pitches, the devil is in the details.

Index-linked annuity sales reached $65.6 billion in 2024, marking a 38% increase from the previous year, the 10th consecutive year of record sales for these insurance products. The enticing pitch is upside opportunity with downside protection — and a 10% free-money bonus if you act quickly!

Beware of invitations to a free dinner presentation. As Stan “The Annuity Man” Haithcock (TheAnnuityMan.com) often says, “If it’s an expensive steak dinner, swallow the food not the sales pitch.”

Here’s what you need to know:

First, be aware that the word annuity covers a lot of ground.

A single-premium immediate annuity (SPIA) is a contract you make with a life insurance company. You give them a lump sum of money, and they promise to give you a fixed check for life or a specific period that you choose. The amount of that monthly check depends on the lump sum you invest, your age and life expectancy, and whether this payment is for your life only or contractually designed to cover the life of your spouse as well. Or you can customize the guaranteed payment for life with a period certain.

The drawback of an immediate annuity from a highly rated insurance company is the impact of future inflation on that fixed check. At only 3% inflation, your buying power is cut in half in 25 years! (And if you’re offered a cost-of-living adjustment on the payment, the payout is substantially reduced.)

A multi-year guaranteed annuity (MYGA) is the insurance industry’s version of a CD. It promises a fixed rate for a set number of years, typically 3-10 years. At maturity, you can roll over the MYGA or withdraw it. There will be penalties for early withdrawal.

Unlike CDs, interest is tax-deferred in a non-qualified/non-IRA account until you withdraw. But these products are not FDIC insured, so it is essential to choose a highly rated insurance company and purchase within state guaranty fund limits.

An index-linked annuity is a fixed insurance product sold by life insurance agents that offers tantalizing promises of stock market participation with no risk of loss. That “guarantee” may excite you, but the real payoff is for the insurance agent who gets a built-in commission of between 5% and 8%, depending on the length of the surrender charge period.

Here are a few things to know before you buy an equity-linked annuity:

—You never get the full upside of the stock market. Most of these products are linked to an index that does not include dividends — which are historically about 40% of stock market returns!

—Caps on total returns or faux point-to-point index calculations can diminish your promised returns.

—The life insurance company can change the rules midstream, at its discretion, affecting how the index return is credited and thus your eventual payout.

—If the promised base interest rate is insufficient to offset fees and internal costs, you could lose part of your original premium.

—You can always take out the investment or index-linked performance part of the contract in a “lump sum.” Note: that “minimum guarantee” is typically only around 1%-2%. The income rider side of the ledger is not available in a lump sum and can only be taken out in payment form, with payment amounts determined by the insurance company.

—If you add an income rider at the time of purchase, you can only withdraw via the insurance company’s calculated monthly payment schedule. The upfront bonus is typically attached to the income benefit and can only be accessed through a lifetime payments schedule, which the insurance company calculates!

Who is really making money on these products? The life insurance company salesperson will benefit from a built-in commission that can be as high as 8% of your initial premium. Check the early withdrawal penalty percentage. That’s mostly the amount they already paid out in commissions to the agent!

Now that annuities are being offered inside some 401(k) plans, and being recommended as you roll over your plan at retirement, you need to be especially aware of the true costs and restrictions that come along with the sales pitch.

In fact, a well-balanced portfolio of low-cost mutual funds invested in stocks and bonds, along with some “chicken money” in CDs, might very well outperform the returns of these equity-linked annuities during your retirement years. It will take some work on your part, and some self-discipline.

Or you can pay an insurance company to do it for you — at a significant cost. As Haithcock always says: “There’s a reason the insurance companies have those big buildings!”

And that’s The Savage Truth.

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(Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at TerrySavage.com.)

©2025 Terry Savage. Distributed by Tribune Content Agency, LLC.