Episode #151: 7 Questions to Ask Before You Pick an Index Allocation

Episode #151: 7 Questions to Ask Before You Pick an Index Allocation


Fixed index annuities have the ability to earn index interest based on an external market index, but there is no way to guarantee if an index allocation is going to perform as expected over a specific crediting period. In this episode of Money Script Monday, Sean focuses on flexibility, complexity, and transparency to help determine if a fixed index annuity is appropriate for you.


 

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Video transcription

Hello, and welcome to another edition of Money Script Monday.

My name is Sean Brady and today's topic is 7 questions to ask before you pick an index allocation.

Fixed index annuities have the ability to earn index interest based on an external market index.

And components like a spread, cap, and/or participation rate, along with the crediting method, determine how much interest is going to be applied to your contract.

However, index allocations aren't always as straightforward as they may seem.

If you're planning on one unique feature or component of the product, then you may be unknowingly missing many important factors that can impact the earning potential of that index allocation.

That's why it's really important to just know more about it. You can't predict what an index allocation's going to put out or perform over a crediting period.

You just don't know. We don't have a crystal ball.

What we can know beforehand is the flexibility, the complexity, and the transparency of the index allocation options that we're choosing.

And that's why today, we're going to ask the key questions regarding index allocation options within fixed index annuities.

Flexibility

Flexibility

Let's start with number one here. Flexibility question number one. "Can I allocate to more than one option in the crediting period?"

And the answer to this question should definitely be yes.

We want to have a variety of different allocation options, not only to choose from, but to be able to change and diversify and have any number of combinations that can be used in a very needs-based situation.

If our needs are changing, we want to be able to choose different allocations that best suit our needs. So, this is very desirable.

Question number two, "If I choose a multi-year crediting period, can I simultaneously choose an annual crediting period?"

Again, the answer to this question is, yes. This is definitely something we really want.

A multi-year crediting period is very important because you could earn a significant amount of interest in a longer period than just an annual crediting period.

Being able to have both multi-year crediting periods point-to-points, and an annual crediting point-to-point is really important.

We should be able to have the option or the choice to be able to allocate to both a multi-year point-to-point, as well as have the option to credit a portion of your policy to an annual point-to-point.

That way, you're not missing out on an annual interest credit and waiting for maybe a two, three-year term of a multi-year point-to-point.

It's just very advantageous to have the opportunity to do a laddering strategy like that.

Question number three, "Is there an option to lock in an index value during the crediting period?" Now, this is a very unique feature.

And if the company you're interested in, or annuity that you're looking at offers an index lock feature, then it's definitely something we want to have in our back pocket.

Index lock feature allows you to lock in the index value anytime during the crediting period and that value is then locked into the end of the crediting period.

And at the very end, when they apply interest or not, you could receive more index interest, or you could receive less index interest.

It is a unique feature and it's just one of those things that gives you peace of mind in uncertain times where you could receive interest credits.

If it hits a point that you're comfortable getting, you just lock it in and that'll be applied. So, now, that's flexibility.

Complexity

Complexity

Let's move on to complexity.

Question number four, "Is the amount of index interest on my annual statement easy to understand?"

The answer to this question is obviously, yes. We want to be able to understand our annual statement very easily.

Crediting methods, when they are calculated, they should really only have one component that they use to calculate the index interest.

That should be the cap, spread, or participation rates. And once you know that, you can easily calculate yourself what kind of index return you're going to get.

Question number five, "Are there multiple factors that impact the amount of index interest credited at the end of the crediting period?"

The answer to this question should definitely be no. We don't want to have multiple factors that could change your interest or credits to your policy, for simplicity reasons.

Again, crediting method should really only have one component that can change, the cap, spread, or participation rates.

And that way, you know what is going to be applied and change and be calculated for the credit that's going into your policy.

There should be no other factors other than the crediting method that should change what kind of interest you're going to get on your policy.

So, we've talked about flexibility, we've talked about complexity, let's talk about transparency.

Transparency

Transparency

Question number six, "Is the spread, cap, participation rate a declared rate?"

The answer to this should be, yes. We want our spread, cap, participation rate to be declared, not calculated.

That way, you know exactly what rate is going to be applied to your index return, and that way, you could calculate yourself and you know exactly what's going to be going into your policy.

Again, the spread, cap, participation rate should not change during the duration of your crediting period. Excuse me.

Finally, question number seven, "Is the spread, cap, participation rate dependent on index performance?"

And the answer to this question should be no.

What they declare at the beginning of the crediting period, what they declare for your spread, cap, participation rate should be what it is at the end, the spread, cap, participation rate, what they declare at the beginning should be what it is at the end.

That way, you know when that index return comes in, you could calculate it. It shouldn't vary based on different levels of index performance.

So, now that you know the answers to the questions about flexibility, complexity, and transparency about index allocation options within fixed index annuities…

I encourage you to contact your financial professional today to see if a fixed index annuity is appropriate for you.

Thank you. And we'll see you again next time on Money Script Monday.

About Sean Brady

Sean Brady is an Advanced Case Designer at LifePro. He works with financial professionals designing advanced case illustrations that are built for longevity and are always in the best interest of the client.

Disclaimer

This information is meant for educational purposes only.

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