Have you ever wondered, "when is the Federal Government going to do something for me"??

Several times over the past several months, I have been approached by people that have heard about a ‘new’ investment that ‘guarantees’ to double your money in 10 years… That’s right, GUARANTEED!!! When I first heard about this, I was very excited. An investment that can double in 10 years earns a 7.2% annual return so, given today’s low interest rates, that’s an investment my clients need to know about… However, I must also admit that I was very skeptical… The fact is that, the only investments that I consider truly “guaranteed” are those that are guaranteed and backed by the full faith and credit of the U.S. Treasury and, since the 10 Year Treasury Bond has a current yield of just under 2.92%*, I was curious as to how this mystery investment could be both guaranteed and carry an annual yield of 7.2%. So, being the inquisitive guy that I am, I did my homework and this is what I found:

The investment is in an Equity Indexed Annuity

You must leave your money with the insurance company for 10 years and if you withdraw early, you will be charged a penalty (aka, Surrender Charge)

...but the most important thing that I learned was:

They DO NOT guarantee that you can WALK AWAY with “double your money” in 10 years!!! Let me say that again… THEY DO NOT GUARANTEE THAT YOU CAN WALK AWAY IN 10 YEARS WITH TWICE THE AMOUNT YOU INITIALLY DEPOSITED.

Here’s how this works.  When you make your initial investment, the insurance company begins keeping track of two ‘buckets’ of money.  Both ‘buckets’ are filled with an amount of money that is equal to your initial investment.  The first bucket, we’ll call it the Income Benefit Bucket, is credited, annually, with the 7.2% interest rate that is guaranteed by the insurance company. 

The second bucket, we’ll call it the Accumulation Bucket, is credited with an amount of interest that is earned based upon the results of the annuities underlying stock market index (the index that is used can vary by company).

Income Bucket

Accumulation Bucket

At the end of 10 years, the Income Benefit Bucket will have twice your initial investment, guaranteed.  But, here’s the catch…

You CAN NOT walk away with the Income Benefit Bucket… EVER!

The bucket of money that you can walk away with (at the end of the surrender period) is the amount of money that is in the Accumulation Bucket (plus any interest credited during the life of the contract) and we don’t know how much money will be in that bucket until we get to the end of the 10 year period.  The only thing that we know is that the insurance company says that they will let you walk away with at least your initial deposit (and, in some cases, a little interest).  You may be able to walk away with more (depending on how well the stock market index does over the 10 year period), but there are no guarantees there…

So, at the risk of being redundant, let me make this point again:

They DO NOT guarantee that you can WALK AWAY with “double your money” in 10 years!!!

Does that make this a bad investment?  Well, not necessarily. 

In some situations, an annuity can be a useful investment that could help you achieve your financial goals.  But, as with any investment, it is always best to fully understand exactly how that investment works BEFORE you sign the contract so that you are not disappointed in the future (when you need your money most) and learn that your “guaranteed” investment doesn’t work like you thought.  So…

If It Sounds Too Good To Be True,
It Probably Is!

So, if you have any questions about your existing investments or would just like a second opinion BEFORE you invest your hard-earned money, give me a call and I’d be happy to provide you with a FREE, no obligation one-hour consultation. 

If you are not sure whether this rule change applies to you or if you just have some questions that you would like answered regarding your financial situation, click here to request that we contact you (or just give us a call at the office, 707-578-5800 x301).

(*Annuity features including surrender period, bonuses, guaranteed rates, etc vary significantly by company.)