Indexed Annuities are NOTHING like Variable Annuities

Because both variable and indexed annuities have the term “annuity” contained within their names, they have been linked as similar, but the differences between the two are like night and day. Typically, a variable annuity has NO guarantee of principal so it can and does lose value, but quite the opposite, the principal in indexed annuities is guaranteed never to lose value. Gains within variable annuities fluctuate widely, and losses of principal and previous earnings are gone and must be earned back each time the market swings; but in an indexed annuity, interest credits have a minimum guarantee over the life of the contract, and the extra interest credits earned by increases in the linked index are periodically “locked in” after which they can never be lost. Variable annuities have enormous fees deducted from the principal account value each year, regardless of whether the account experiences gains or losses; but in an indexed annuity no fees are EVER deducted from the account value itself, but only paid by a slight reduction in the extra interest credits in positive years only. This method of “sharing” gains, within an indexed annuity is not that unlike the way “no load” mutual funds, the darlings of the do-it-yourself securities investors and fee-for-service financial planners, deduct their hidden fees off the top from a portion of the overall gains. Both variable and indexed annuities have surrender charges for a stated period of time, but these fees are only imposed if the annuity is liquidated entirely, or in an amount exceeding the allowed annual free withdrawal. But considering that in a downswing of the market, the account value in a variable annuity could also be lower than the starting value, the impact of surrender charges imposed in a variable product only compounds those losses. In an indexed annuity the worse case scenario in any type of market is a flat year with no growth. All annuities have been given tax favored status by the IRS in that all earnings within an annuity are tax deferred. But the exchange imposed by the IRS for that valuable benefit is a 10% penalty for withdrawal prior to age 59 1/2, similar to any other retirement savings vehicle. This makes annuities excellent long term retirement savings instruments for someone of any age. With the ability to defer withdrawals indefinitely, and when taking money from an annuity does become necessary, using either their generous free withdrawal privileges or their unique ability to convert the account to a guaranteed income stream that cannot be outlived, annuities are also the perfect distribution vehicles to use once retirement is reached. Any question of suitability raised by the NASD about replacing a variable annuity with an indexed annuity is simply another part of their deceptive propaganda campaign to get control of these incredibly powerful financial products.