Fixed Indexed Annuity as a Fixed Income Instrument

On the scale of available financial products, there are higher risk products with potential for higher returns on one side and products with lower risk, lower returns on the other. With the higher risk options there is the potential of losing not only returns but principal as well. The lower risk returns also
have challenges in terms of market returns not being attractive. Today, there are significant challenges to finding high quality, fixed income investments that offer a good return. With the bond bull market coming to a close, where can someone find something attractive and have their principal protected?

We believe that the narrow and very specific application of a Fixed Indexed Annuity can be positioned inside a client’s Fixed Income portfolio to take advantage of its unique characteristics. It is important to realize that we do not view these Fixed Indexed annuities as anything other than an alternative
approach to the Fixed Income investment marketplace. They should not be compared to stocks or the stock market, they are not bonds, but they are a unique product innovation which include:

 Principal guarantee from a highly rated insurance company
 Guaranteed interest from a highly rated insurance company, typically 1% over the life of the contract
 Several interest-crediting options that include benchmark stock market indexes

How well do they compare to other Fixed Income instruments? Let’s look at an actual example:
In June of 2009, we placed a client into a 7 year Fixed Indexed Annuity. The client elected to have 50% of her deposit put in the “Index” option and 50% put into the “Fixed” option. Through June 2013, the annualized return for her has been 4.47%.

If she would have chosen other fixed income instruments at that time, here is how it would have looked
in the same time frame: