Should I invest in a hybrid fixed indexed annuity?
I am thinking about putting my life savings into an annuity that is supposed to pay me an 8% signing bonus and 7% compounded interest over a 10 year period with no risk of losing my initial investment. The product is casually referred to as a Hybrid Fixed Indexed Annuity, and is named Security Benefit Secure Income Annuity (SIA) through Security Benefit Insurance Company. My question(s): Exactly how is the initial investment guaranteed? The sales people call it GIC, which they call Guaranteed Investment Contract. It looks like it is covered by my state (Michigan) and that really helps with peace of mind. But I am wondering if there is a connection that goes beyond my state. I am looking for more protection that is if more protection is appropriate. Anything you might add to my understanding of the "risk" to initial investment would be greatly appreciated. Thank you
I don't ever like to hear the words "I am about to put my entire life savings into.." pretty much anything. Be very careful about the fine print, including "caps" to earnings "participation rates" withdrawal rules, and the like. If you cannot explain to me exactly how the money grows, what your investment will be worth if the market goes up 10% or down 10%, what the surrender period is and what are the exceptions, and what all the rules are regarding how you take your money out in retirement - then don't go here. The investment is "guaranteed" by the issuing company. Some fixed annuities are issued not by traditional insurance companies but by investment firms, which typically pay higher rates, but are less secure than the traditional insurance company issuers. My advice is to diversify your holdings. Never put all of your savings in one product - especially something illiquid (meaning you can't get out your money without a penalty).
While you should never put all of your life’s savings into an annuity, it can be a viable solution if properly understood. The term “hybrid” was advertised by one financial services company in order to make the annuities sold through their company seem different than offered by other financial advisors. However, a hybrid annuity can technically be a fixed indexed or variable, but the most popular is the fixed indexed.
The 8% bonus is added to your Accumulation Value, and all or part of it may be taken away (called Bonus Recapture) if you surrender your contract during your Surrender Charge Period. The 7% compounding interest is another feature in your contract called an Income Rider (separate from your Accumulation Value). It guarantees a specified amount (called Lifetime Income) that is available either single or joint life, assuming you do not take any other withdrawals from the contract. In essence, your 7% compounding interest is not a rate of return, it is a rate that your income value grows by. If you decided to surrender your contract in the future, the 7% compounding interest would disappear. For fixed indexed annuities, the terms and conditions are outlined in the Statement of Understanding.
Annuities are not FDIC insured, though they are backed by the claims paying ability of the insurance company, or a state Guaranty Association. In order to find out how strong Security Benefit Life is, I would look up their Comdex score, which ranks from 1-100 and is a composite of all the ratings that a company receives, including A.M. Best, Standard & Poor's, Moody's Investors Service and Fitch.
Keep in mind that annuities are long-term vehicles that should be used as a risk management tool, not a short-term solution.
If you have any further questions, I'd be happy to help.