The History & Evolution of Fixed Index Annuities

By Andy Boettcher

Read on to discover the roots of Fixed Index Annuities and how they have grown to become one of the most reliable retirement income investments.

The History of Fixed Index Annuities:

The Development of FIA's

The origin of fixed index annuities (FIA’s) was marked by a significant event, the 1994 bond market crash. The sudden increase in federal interest rates by 1.5% in a single year caused widespread panic among conservative investors, causing insecurity in traditional investment options. (Not as crazy as the interest rate hike we saw at the end of ‘22 that is still continuing into ‘23!) Hiding money under a mattress was no longer a viable solution for securing a stable retirement income.

The Birth of Fixed Indexed Annuities (FIA’s)

The first fixed indexed annuity (FIA) was created by a Canadian company called Keyport Life in 1995. Its purpose was to offer clients a return that exceeded the standard minimum guarantee. This was achieved by purchasing call options on an equity index, allowing the annuity to hedge its guaranteed interest rates while also having the potential for higher interest rates. The FIA became popular among investors during a time when the bond market was producing negative gains, banking institutions were providing low interest guarantees, and the markets were experiencing volatile fluctuations. The FIA's guaranteed principal, guaranteed interest, and potential for further growth made it an attractive investment option for many.

The Evolution of Annuities Through Market Changes

The concept of annuities dates back to ancient times, with evidence suggesting that the Egyptians had annuities for their princes. The first fixed annuity in the US was offered in 1759 to ministers in Pennsylvania. Initially, annuities were only accessible to the wealthy, but the stock market crash in 1929 led to a change in investment practices and the rise of mutual funds for diversification. The development of 401(k) plans in the 1980s also helped increase participation in retirement savings. These new accounts quickly became popular. In 1983, 7.1 million employees participated in a 401(k) plan, a number that grew to 38.9 million by 1993. As of 2019, 401(k) plans covered an estimated 80 million people and held $5.7 trillion in assets. However, these plans still faced losses during market downturns. The search for a better and safer way to grow retirement assets led to the evolution of fixed index annuities.

The Emergence of Indexed Annuities

The creation of indexed annuities was a response to the financial struggles investors faced during the 1994 bond market crash and the subsequent interest rate hike. As returns from safe investments like money markets and CDs were disappointing, investors sought alternative options.

Variable annuities, which were introduced in 1952, but also faced challenges during this time as their value was tied to the performance of mutual funds that invest in stocks, bonds, and money markets. The stock market downturn and high fees led to negative returns for variable annuities.

In this climate, with fixed annuities’ interest rates declining, the market was ready for a new annuity product. This led to the birth of the Indexed Annuity. This new type of annuity provided a secure option for retirement savings while also offering potential growth opportunities beyond bonds and CDs, all while still maintaining safety and liquidity.

Keyport Life and Genesis Financial in Canada introduced the first equity-linked indexed annuity product, the Key Index, in February 1995. The first buyer paid $21,000 and received a $51,779 return at the end of the five-year term, a remarkable performance. By the end of the year, other insurance companies followed suit and $130 million in FIA investments were made.

How Indexed Annuities Grew in the Late ‘90’s

FIAs saw rapid expansion during the first five years of their existence, with the number of carriers increasing from just two in 1995 to more than fifty by 1999. The SEC conducted a comment period to determine whether FIAs should be classified as securities, but ultimately determined that annuities should not. Several state legislatures also called for balanced language in marketing materials to prevent misleading information for buyers. Despite increased regulation and scrutiny, the period ended with over $5 billion in annual FIA sales. The Fixed Index Annuity had established itself as a valuable investment option for growth and protection, particularly during the longest bear market since the Great Depression.

The Dot Com Stock Market Crash

During the Dot Com stock market crash of 2000-2002, which lasted over 600 days and saw a loss of 38% in total stock market value, as well as the downfall of Enron and WorldCom, fixed indexed annuities (FIAs) saw a surge in sales. Despite the slow growth at the start of the period, FIA sales almost doubled in 2002, from $6.5 billion to $11.7 billion, demonstrating their value during a tumultuous bear market.

The Attempted Attack on the FIA

During the market recovery, the growth of Fixed Index Annuities (FIAs) was slow but steady. Despite misleading statements made by established players in the financial industry to slow the growth of FIAs, the insurance industry continued to gain a share of the financial world from banks and brokers. False claims, such as "the money goes back to the company if you die, not the beneficiary" and "no access to your funds," were debunked. However, it is true that some types of annuities, such as Variable Annuities, have high fees and risks that may not be suitable for seniors. In 2006, the NAIC introduced the first Guaranteed Lifetime Withdrawal Benefit (GLWB), which provided a lifetime income stream similar to that of a traditional lifetime pension. The addition of free withdrawal riders and the ability to pass on account values as a death benefit further strengthened FIAs. With time, FIAs are becoming more robust, offering protection against future inflation and income benefits for beneficiaries.

How Do I Create My Retirement Plan Today?

By now, it's clear that safety is a top priority for many people. But what about missing out on potential market gains? The good news is that you don't have to choose one over the other! Fixed Indexed Annuities offer both safety and the opportunity to participate in market growth. Since 1995, over $200 billion dollars has been invested in these types of annuities, and more and more companies are using them to protect their employees' qualified funds. In fact, not a single dollar has been lost due to stock market fluctuation. This is a prime example of safe money.

As time marches on, we no longer have to play in the stock market Casino!
We are no longer forced to pay high management fees and carry the burden of market loss in our golden years of retirement!
Better put, we can have our cake and eat it too!
We can watch our money grow and not have to worry about market loss.
The old way is gone while the new and improved way to live is through a worry-free retirement, with Fixed index Annuities.
How is my money protected from market loss?
What is the secret sauce?

Insurance companies are structured as "Legal Reserve Companies," meaning that the funds you invest are kept in reserve accounts and are protected dollar for dollar. These companies have strong financial standings, as evidenced by their ratings (AAA, AA, A, BBB, etc.). I work with companies rated A or higher. These companies use their operational costs to invest in established index funds, such as the S&P 500 or NASDAQ, thereby avoiding the fees and volatility associated with fund managers and sales fees.

As a conservative investor, you want investments with minimal fees and risk while providing growth, and that's exactly what you get with fixed index funds from insurance companies. When the market dips, the company trades options to protect your investment, so you never lose money due to market volatility. On average, you can expect a return of 5-8% in normal years and an even higher, uncapped growth during market booming years. This brings the added peace of mind that your money is protected and insured.

It's time to secure your retirement and grow your nest egg with a lifetime income plan that offers protected and insured assets, without the worry of fees or market loss. Schedule a call with me below to find out if an Annuity is right for you.