Another sign that more investors could be sensing danger ahead for the stock market could be measured by the record high demand for fixed-indexed annuities, which is a financial product that offers some guarantee of principal protection in a down market.

In its latest report on the U.S. annuities market, Boston-based Cerulli Associates reported the sale of fixed-indexed annuities accounted for nearly 57% of total annuity sales in 2019, climbing to an all-time high of nearly $74 billion.

“The high number of fixed-index annuity sales are a response to investors observing that the market continues to go up and this is a strategy to put a safety net under their portfolio if the market fails, said Robert Fragasso, chairman and CEO of Fragasso Financial Advisors, Downtown.

Investors’ nerves are strained in part due to how long the stock market has been rising — this bull market is more than 10 years old — and the concern that something will trigger a pullback. Whether that would be a trade war or a new coronavirus or something else, many just don’t want to get caught unprepared.

Annuities in general, which are issued by insurance companies, come in several shapes and sizes. They have a reputation for being among the most complex family of financial products on the market.

Fixed-indexed annuities are designed to offer better returns than a bank CD.

They are tax-deferred products and their annual growth is benchmarked to a stock index such as the S&P 500, the New York Stock Exchange or Nasdaq.

Part of the allure is that they are marketed as bullet-proof investments that cannot lose money. An index annuity’s growth is subject to rate floors and caps — meaning it will not exceed or fall below the specified return levels even if the underlying stock indices fluctuate outside of those set parameters.

But there’s a trade-off, according to some Pittsburgh investment firms that avoid the products.

“You pay a price for that,” Mr. Fragasso said. “There is a cost for the contract. You have to weigh that cost versus the perceived benefit. Any annuity contract is complex. There’s a lot of moving parts and you better be sure you understand all the provisions of the contract because it is a contract.”

He said that his firm does not sell fixed-indexed annuities due to their high fees and other complications related to transparency.

Jim Meredith, executive vice president of the Hefren-Tillotson financial services firm, Downtown, said investors have flocked to fixed-index annuities, seeking safety from stock market risk and looking for a higher yield on their cash.

“They are regulated like insurance policies and do not have the disclosure requirements of a variable annuity or a mutual fund,” Mr. Meredith said. 

“The second thing they tout is your account value never goes down,” he said. “However, your account value is not your redemption value. The redemption value is subject to high surrender charges and market risk. Essentially, if you ask for your money back, all guarantees are off.”

He said fixed-indexed annuities are not sold or recommended by Hefren-Tillotson due to their high commissions and lack of disclosure. 

“These products are successful in one way,” Mr. Meredith said. “If you are willing to surrender your investment principle for the rest of your life and not ever need that $100,000 you invested again, the income will be there. 

“But even if you collect 6% from the fixed-income annuity for 16 years, the house is still playing with your money,” he said. “The insurance company would have returned 96% of your money or $96,000 and you still haven’t made any return.

“If you live for 50 years, that’s when you see a benefit,” he said. “But you can never get your money back with market risk.”

Tim Grant: or 412-263-1591.

First Published February 21, 2020, 5:00am

Leave a comment

Marshall Rosario   |   Licensed Oregon Insurance Producer   |   Agency Owner   |  Field Underwriter   |   503-512-5454   |

IMPORTANT: During the COVID-19 outbreak to help protect our customers and associates, all consultations will be held via phone or video conference ONLY.

Get a Free Quote Today!