Index annuity buyers from a year ago are seeing 7 percent, 8 percent and even double-digit yields credited to their index annuity–unless they were the one-in-three buyers who stuck their money in the fixed account. Based on my modeling and actual results, index annuity buyers should always keep 100 percent of their money allocated to indexes 100 percent of the time, with three exceptions:
1. The carrier offers a five-year or longer fixed rate of 6 percent, or higher
The carrier offers a five-year or longer fixed rate of 6 percent or higher. Although the average index annuity yield was 8.2 percent from 1997 to 2002, the reality is 6 percent is likely to be better than many five-year index annuity returns.
2. You use an equity kicker method.
In my rate modeling, a blended method combining a two- or four-year index-linked return with a fixed account was competitive with annual reset methods.
3. You can predict the future.
Everyone laughs at the foolishness of trying to predict the future and then they try to do it themselves.
Today many FIAs have index caps that are double their fixed yield, meaning one good index-linked year can offset a bad one. Some rules of thumb are if the annual point-to-point cap is 175 percent or more of the fixed rate, the averaging method cap is at least double or the uncapped participation rate is at least 35 percent for an annual point-to-point or 55 percent for an averaging method, it makes sense to go for the indexed option.
