Annuity Crash Course — 4-Module Video Series
How the bond-and-options mechanic actually works — and why the carrier's model makes principal protection possible.
No cost. No commitment. No sales pressure.
Serving Clients Nationwide
Prefer to read? Everything Al covers in Module 2 is below.
Welcome Back
Hey there, and welcome back. I'm Al Abarroa, and this is the Annuity Crash Course. Most investors want a simple solution to a complicated problem: what's the best way to make it through retirement without running out of money? How do you get a reasonable rate of return without getting caught in punishing stock market volatility?
I believe one of the best ways to do that is through the use of fixed indexed annuities. The principal of a fixed indexed annuity will never lose value if the market goes down, can provide a reasonable rate of growth, and even has the ability to offer investors a lifetime of income no matter how long they live.
The Two Trade-offs
Those amazing features often lead investors to ask me: how are fixed indexed annuities not too good to be true? Due to their unique ability to offer market-linked growth and lifetime income along with principal protection, I understand how investors might think there's a catch.
There are two main trade-offs. First, the time commitment investors need to make when buying an annuity. Second, the fact that investors may be limited to a maximum amount of gain. Typically, annual withdrawal limits on a fixed indexed annuity are between seven and ten percent per year after the first year. Maximum gains are typically limited by what is called the index participation rate.
There is no way an insurance company could offer an investment that never loses money without some of these restrictions. That's simply reality — and once you understand the mechanics, they make complete sense.
How the Carrier Makes Money — Bonds
It's also important to understand that the strength of the guarantee is tied to the financial strength of the insurance company. In order to guarantee your principal, give you upside potential, and provide a lifetime income option, the insurance company needs to be able to make money for themselves.
The way they do that is by taking the capital you've allocated to the annuity and buying bonds. Now, it's important to understand — they're not buying bonds for you. They're buying bonds for themselves. They have the opportunity to make money from bond trading revenue and from the interest that the bonds pay.
Each carrier has its own approach to how they buy these bonds. Some are more conservative. Some have a greater appetite for risk. For instance, some may invest in high-grade bonds and some may invest in mortgage-backed securities. The bottom line is that bond buying is how insurance companies are able to profit — allowing them to stay in business and offer you those guarantees.
The Options Budget — Where Your Growth Potential Comes From
The carrier then takes a portion of that profit, which they allocate to what we call the options budget. That's where the focus turns to the markets — where the carrier then buys options.
This provides you the opportunity to earn interest credits when the underlying index appreciates, without actually taking on the risk that comes with owning stocks. The reason you don't lose any money if the market goes down is because the option was not bought with your money. You're not investing in a risky options or bond-trading scheme.
It was the insurance carrier that bought the option to provide you the opportunity to profit from the market's climb — and they paid for this opportunity on your behalf from their own pocket. That option is where your profit potential comes from. It's what generates the interest credit.
Lifetime Income — How the Carrier Spreads the Risk
Finally, much like car insurance, life insurance, and health insurance — by spreading out longevity risk across their client base and making careful calculations, insurance companies can offer lifetime income features as well.
This is how an insurance company can run a profitable business, provide you with guarantees, and still provide you with upside. Simply put, a fixed indexed annuity is not too good to be true.
Who FIAs Are — and Aren't — Right For
Now, they're not for everybody. But for investors who never want to lose money, want some growth, and want the potential for lifetime income so their money never runs out — they can be a great retirement planning tool that helps improve your financial life in retirement.
I look forward to speaking with you soon and helping you improve your future quality of life and retirement outcomes. Thank you.
No. Our first conversation is a review — we listen to your situation, look at what you have, and tell you honestly what we see. If an annuity makes sense for your income plan, we'll explain why. If it doesn't, we'll tell you that too. We don't earn anything unless a product is placed.
Many of our clients do. We specialize specifically in annuity contracts and retirement income structure — most general advisors don't go this deep on the product mechanics. We regularly work alongside existing advisors as an independent second opinion on the annuity component of a plan.
That's one of the most common reasons people reach out. We review existing contracts regularly — the riders, the guarantees, the fees, and whether the structure actually fits your income plan. You may find it's performing exactly as intended. Or you may find it isn't. Either way, you'll know.
One conversation. No cost. No commitment. We'll review your situation and tell you honestly whether a fixed indexed annuity belongs in your retirement income plan — and if so, how to structure it correctly.
No sales pressure. No commitment. Most reviews completed within 2 business days.
