How About a 6.88% Net Historical Return? What Annuity Companies Won't Tell You.
The only problem I have with annuities is the way they are marketed. They (insurance companies, financial advisers) market these nice returns. Yet, they don't tell you that they are probably a low probability occurrence. This particular product also has a 2% fee attached to it as well which is very high for a fixed indexed annuity. Here is the disclaimer:
HYPOTHETICAL EXAMPLES shown use back-casted BNP Paribas Momentum Multi-Asset 5 Index (BNPP Momentum 5 Index) data over the last 15 calendar years (1/1/2003–12/31/2017). Examples assume $200,000 premium allocated in the FlexMark Selectsm LT no-bonus product BNPP Momentum 5 Two-Year Point-to-Point With Participation Rate Fee Option over a 10-year period with no reallocations, no additional premium payments, and no withdrawals. Examples further assume the participation rate did not change throughout the entire period shown. Examples are net of the 2% index strategy fee, which is deducted at the beginning of each two-year term. Examples are not reflective of actual annuity performance. FlexMark Selectsm LT was not available for purchase until September 2017. Past performance, whether actual or hypothetical, does not guarantee future results.
This is an email that is marketed to financial advisers. Do you ever wonder where financial advisers get their marketing ideas? Here is the number one reason why past performance does not guarantee future results. It is also the reason the potential return claims are misleading at best.
"Examples further assume the participation rate did not change throughout the entire period shown."
The insurance company has the ability to change participation rates annually to control their exposure against what investors earn. Remember these annuities are guaranteed to never lose money. So, do you really think that the insurance company is going to allow the contract holder to earn 6.88% after expenses and still guarantee them against loss of principle?
Keep in mind that this product that they are showing did not open for new investments until September 2017. Thus, you will never know what the historical participation rate would have been because the product didn't even exist. In this case, they are assuming a great participation rate that never changes. That is a very aggressive assumption.
Insurance companies build these products to make money. This is why they retain the ability to change the participation rate (rate in which the contract holder participates in returns). Remember there is no free lunch!