Why You Should Be Careful When Investing in Fixed Indexed Annuities

Investing in Fixed Indexed Annuities

There are many different investment options available to the public, and each of them offers a number of unique benefits. 

Options that offer high returns, such as the stock market and mutual funds, are typically more volatile and risky. With the uncertainty of today’s market, it is no wonder that a lot of people are interested in low-risk options, and this is why Fixed Indexed Annuities can be a popular option for many. 

FIAs offer lower returns but guarantee a fixed interest rate, and you only get taxed on your money when you withdraw it. There are a number of benefits to this type of investment option but conversely. But there are also a number of risks that potential investors need to be aware of. 

In today’s article, we are going to explore the different aspects to keep an eye out for in FIAs.

Read the Fine Print to Avoid Extra Fees

Extra fees are arguably one of the most common areas of concern that investors need to look out for when it comes to FIAs. On the surface, FIAs appear sensible. They offer low returns for lower risks and a greater level of stability and security. Everything works out fine, right? 

Well, not always. There are a number of fees and clauses that can make you wish you chose another investment option. 

These hidden fees are often tucked away in your FIA contract, which is why you need to be thorough when reading it. There are two main “hidden” fees that tend to eat into your FIA: Fund management fees and Penalties. 

These two directly affect your income, but they aren’t the only ones. The commission, underwriting, and taxes on beneficiaries are other aspects that can take a cut.

Fund management fees may initially seem insignificant, with their percentage values being as low as 0.50% – 2.00% of your account value per year. However, you need to remember that over time, even this can add up to a significant amount.

Assuming a fund management fee of 1% per year and an initial account value of $100,000, you are looking at $30,000 in fund management fees over 30 years. 

Similarly, penalties are particularly annoying to deal with. These penalties come into place if you decide to withdraw money before you finish the surrender period. 

Some contracts allow you to withdraw a certain percentage of your account value (also known as a partial surrender), but if you withdraw beyond a particular amount, then get ready for penalties. 

For those who really need the money and have to withdraw money from their FIA, they may be looking at a penalty of ~6% of the withdrawn amount. On top of that, any large withdrawal that you choose to make before the age of 59 ½ will cost you a 10% penalty that you need to pay the IRS. 

Watch Out for Vague Contracts as Well

Spotting hidden fees requires studying the annuity contract thoroughly. There couldn’t be a better instance than the Allianz 222 fees that ended up shocking a lot of people due to the vagueness of their contract. 

There is a line in the contract that talks about an allocation charge (a sort of commission to the insurance agent) that is deducted annually. It mentions that the charges are 0%. But at the same time, the contract mentions it can go up to 2.5% if certain criteria are met.

These “criteria” are not stated in the contract, and potential investors are likely to overlook this important piece of information unless they have an experienced financial consultant go through it and find out what these criteria are. 

Bryan Anderson is an annuity expert and strategist who helps people plan out their investments in low-risk options. Anderson spotted the hidden fees in the Allianz 222 plan and was able to warn potential investors about it. 


Fixed-indexed annuities are known to be low-risk and safe investment options, making them ideal for those investing in retirement. Interest rates for annuities have usually ranged anywhere between 5%-8%, which is considerably lower than the sort of returns you get with high-risk investments.

Despite this, people still go with it because they naturally wish to prioritize the safety of their money for retirement.

It is unfortunate then that these low returns are then further decreased by the numerous fees that insurance companies put on the contracts. Becoming aware of where your money is going is one of, if not the most important aspect, of investing, and due diligence here is one of the best investments you can make for yourself.

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The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.