'Monopoly Money': Don McDonald to Colorado Man Pitched $1 Million Annuity With 54% Bonus at Free Steak Dinner

A pitch for a 54% bonus and a chart with a rising green line can mask a fixed indexed annuity’s limits. The product may be described as a fixed income annuity, even though it is a fixed indexed annuity with returns tied to a market index through caps, floors, and participation rates. Upside gains can be capped, while downside can be limited to zero, producing results that historically fall around the low single digits. Comparisons to the S&P 500 can use price return rather than total return, overstating how closely the annuity tracks the market. The bonus may be nonwithdrawable, effectively preventing access to the promised value.

"“You don't get 54%, at least not in real money. Maybe it's kind of Monopoly money, because here's the deal: that 54% can't be taken out ever, period.”"

"“It's a fixed indexed annuity, not a fixed income annuity. If he said fixed income, he is purposefully misleading.” A fixed income annuity pays a guaranteed monthly check. A fixed indexed annuity is far more complex, with returns tied to a market index with caps, floors, and participation rates that almost always favor the insurer."

"“The return on indexed annuities has, since they've existed, historically been in the 3 to 5% range approximately.” The green line shows the annuity. The red line shows the S&P 500. The annuity's returns are capped at 10% on the upside and 0% on the downside over 10 years. Sounds great until you ask what the green line actually delivers."

"“The chart's third trick: the S&P 500 comparison is almost always price return, not total return.” McDonald noted that the comparison can overstate how closely the annuity follows the market by ignoring dividends and other components of total return."

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