Can index annuities provide stock market returns?

For several years, I have written in-depth annuity reviews because there is little information about these complex products. Many retirees are being enticed by free dinner seminars and promises of huge returns with no risk. I give an A+ to insurance companies for producing a product that they claim to be "no fee" (are you kidding me? Fees are simply hidden so you can't see them), no downside risk (yes true) and still has the potential for stock market returns (too good to be true). Let's take a look at that last piece and the topic of this blog post: can index annuities provide stock market returns?

An Emphatic No!

Simply put, there is no way that index annuities will ever produce stock market returns over the life of the product and they should be thought of a fixed income alternative, not a stock alternative. When they throw in index choices like the S&P 500, this just makes potential buyers have unrealistic expectations.

So how can I say these product will never produce equity like returns? It's simple. Just look at how the insurance company is investing the underlying assets. Remember that index annuities don't own any underlying assets (stocks or bonds) like a variable annuity. It is purely an insurance contract and the insurance company invests as they please.

Here's Why. How does the insurance company invest?

Luckily one of the top 3 index annuity providers is a public company so they show exactly how they invest. As of December 31, 2017, 96% of their products sold are fixed index annuities and they have been a top 3 producer by annual sales for 16 out of the last 17 years. Here is how they invest their money:

index annuity investment portfolio

It is not surprising that their investment portfolio is extremely conservative since their products have no downside risk. If you look at the breakdown, the entire pie is fixed income/bonds with NO stock market exposure. After they pay their agents, staff, rent, executives, marketing and more, they still earn a profit for shareholders, but that comes at the policyholders' expense.

In Conclusion

This top insurance company invests all of its investment portfolio in fixed income assets. After paying out all their expenses and earning a healthy profit margin on top of that, then they can pay out policy holders a low return. It seems clear to me that most people will be better off investing themselves directly in fixed income assets and cutting out the middle man.

Buyers of annuities will be okay if they see these products for what they are: longevity insurance. They can be used for a small part of an investment portfolio for their safety where they can provide a guaranteed income for life. But never expect anything close to stock market returns! This type of annuity works best for those in great health and a family history of longevity. Because if you live into your 90s, you will likely do okay thanks to the guaranteed income rider; however for the majority of policy holders, they would be better off investing themselves in a conservative portfolio of stocks and bonds.

Photo by Marc Najera on Unsplash

Share This Story, Choose Your Platform!

About the Author: Chris Wang

Chris Wang


Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Runnymede Capital Management, Inc.-"Runnymede"), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Runnymede.  Please remember that if you are a Runnymede client, it remains your responsibility to advise Runnymede, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Runnymede is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Runnymede's current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: Runnymede does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Runnymede's web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Search Website

Annuity Review Database

Follow Our Podcast

Google Podcasts
Apple Podcasts

Recent Posts