What Type of Annuity Can Lose Money
Annuities can simplify your path to a financially secure retirement. In this brief annuity guide, I will quickly cover exactly which types of annuities can lose cash value and which types cannot.
You can Lose Your Money in a:
• Variable Annuity (VA)
• Registered Index-Linked Annuity (RILA)
You Cannot Lose Your Money in a:
• Fixed Annuity
• Fixed Index Annuity
• Single-Premium Immediate Annuity
• Deferred Income Annuity (DIA)
• Qualified Longevity Annuity Contract (QLAC)
• Long Term Care Annuity (LTC)
• Medicaid Compliant Annuity (Irrevocable and Unassignable SPIA)
Can You Lose Money in a Fixed Annuity?
No, you can not lose money in a fixed annuity. Fixed annuities provide a guaranteed rate of return for a set period of time (usually 2 to 10 years).
Because of their similarity to bank certificates of deposit fixed annuities are often referred to as CD Type Annuities.
Can You Lose Money in a Fixed Index Annuity?
No, you can not lose money in a fixed index annuity. An index annuity guarantees the least amount of interest you will earn in any given contract year is 0%.
The interest your annuity is credited is determined by the performance of a stock market index. If the index goes up you will be credited with a percent of the gains and if it goes down you earn nothing and lose nothing.
While I am a big fan of indexed annuities please don’t be fooled into believing or expecting them to deliver equity-type returns. In reality, the goal of an FIA is to earn 1.50% to 2.00% more than you could in a guaranteed fixed rate annuity.
Can You Lose Money in a Variable Annuity?
Yes, you can lose money in a variable annuity. When you purchase a variable annuity your money is invested directly in the stock market via sub-accounts; similar to a 401(k).
When you purchase a fixed or fixed index annuity from an insurance company you are essentially purchasing an insurance contract and your funds are invested into their general account much as life insurance premiums would be.
In addition, most variable annuities come with a fair amount of fees including:
• Sub-account fees
• M&E Fees ( mortality and expense)
• Fees for additional riders (typically lifetime income riders or death benefit riders)
It is not uncommon to see variable annuities with 3.50%+ fees all in; which means you would have to earn at least 3.50% annually just to break even.
Can You Lose Money in a Registered Index-Linked Annuity?
You can lose money in a registered index-linked annuity (RILA). RILA’s are a hybrid between fixed index annuities and variable annuities. The interest you can earn in any given year is still capped like it is in an index annuity except, but your upside potential is greater.
If the stock market does have a negative year you can lose money but RILA’s offer either a “buffer” or a “floor” which means, depending on the specific index-linked annuity, the amount you can lose is either:
• limited to a certain percent (i.e. -10% floor), or
• The insurance is responsible for a specific percent of a negative year (i.e. 10% Buffer) and then you take any remaining losses.
You Can Not Lose Money in an LTC Annuity
You cannot lose money in a long-term care annuity due to market performance or volatility as you are not directly investing in a stock market index.
However, they are different types of annuities that are referred to as LTC annuities. There are fixed annuities and fixed index annuities designed almost entirely for long-term care protection.
These types of long-term care annuities don’t accumulate any interest to speak of but they don’t charge a fee; meaning you can’t lose money
There are optional annuity income riders that have an LTC component to them and these riders come with an annual fee.
So, to be 100% transparent, someone may call an index annuity with an optional LTC Enhancement an LTC Annuity. In that circumstance, you could lose an amount equal to your annual fee in any given contract year in which you earn zero percent interest.
Surrender Penalties and Fees
Early Surrender Penalties
Charge (CDSC). If you’ve had experience investing in mutual funds you are likely familiar with the concept of CDSC’s as investors who sell Mutual Fund Class B shares within a specified number of years from purchase are also assessed a CDSC – the same exact concept with an annuity.
Finally, index annuities with an optional income rider have become increasingly popular because they actually pay higher guaranteed lifetime income payments than traditional annuitization with a lot more flexibility.
Reclaiming the Future Retirement Study
If you are considering an index annuity with an income rider it is important to note that your annuity would decrease by the amount equal to your rider fee in years in which you do not earn any interest.
A retirement survey conducted by Allianz Life, called “Reclaiming the Future” examined baby boomers’ thoughts, feelings, and expectations for retirement. The study provides great insights on the importance of guarantees in retirement, some strategies to consider, and a handful of interesting facts.
I have highlighted the two statistics that stood out the most to me below.
• 61% stated they feared outliving their assets more than death.
• 69% said they would prefer an investment that was guaranteed not to lose value vs. 31% favored a retirement vehicle designed for high returns.
You can print or download Allianz’s entire “Reclaiming Your Future Whitepaper” here.