Index annuity "return" is not

annualized return on investment


"Return" is the most abused word in the insurance industry because it's an ambiguous word. When consumers hear the word "return" they usually think about annualized return on an investment. For example the S&P 500 index (including dividends) returned 21.64% in 2017. Or from 2012 to 2017 the S&P 500 index (including dividends reinvested) returned 15.62% per year. We're talking about "annualized return on investment" (ROI), also known as internal rate of return (IRR). It's an apples to apples way of comparing investments.


But when Mr. Annuity Salesman talks about the "return" of an index annuity he is NOT talking about return on investment. He's merely talking about an accounting ledger that will be used as the basis for determining income payment rate. If this dollar figure was actually cash surrender value then it could indeed be used for determining annualized return on investment -- but it is not. This accounting ledger is commonly referred to by the insurance company as roll-up rate, income base, income value, accumulation value, interest crediting, protected benefit value, or other term.


Very few insurance salesmen will ever talk in terms of annualized return on investment with regard to index annuities because this would expose the true inferiority of the products. So for comparison purposes, what kind of annualized return on investment can you expect to get with an index annuity? CD-like returns! For example in today's low interest rate environment, index annuities are returning between about 1% and 3%. And yes, CD's may wind up doing better!


NOTE: When speaking about "return", insurance salesmen may also be talking about income payment rate instead of annualized return on investment. Don't ever be confused into thinking that a seemingly high income payment rate means that an index annuity provides a high annualized return on investment. Annualized return on investment can only be calculated by knowing the sum of the cash surrender value and the total of all income paid out. Subtract the initial investment value to determine total return. Then use a site like this one to determine annualized return on investment. Now you can determine a number figure from which to make an apples to apples comparison versus other investments.




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