Mark D. Goldstein, CFP®
Certified Financial Planner
SAFE-Money Alliance

Pueblo Plaza Executive Suites
1100 S. Main St., Suite 10
Las Cruces, NM 88005
(575) 556-2472

Intelligent Office Complex
7362 Remcon Circle
El Paso, TX 79912
(575) 556-2472

Advisors Circle
3701 Algonquin Rd., Suite 150
Rolling Meadows, IL 60008
(877) 442-0698 Toll-Free

"Guaranteed SAFE-Money Solutions for a Successful Retirement!"


I hear it all the time: "Come on, Mark, it sounds too good to be true. How's that even possible?"

Warning: This gets a bit technical, but here's how index annuities really work...

When an insurance company issues an index annuity contract, first and foremost, they guarantee that your money is protected. When the stock market goes up, you get to participate in the gains. But, when the stock market goes down, you never lose anything.

You see, when you deposit your money with the insurance company that issues your index annuity, they use that money for three purposes:

1. They put most of the money in bonds, which earn interest.

2. They deduct a small amount for their own profit and expenses. It's called a "spread".

3. They use the rest of the interest money to buy index options.

Index options provide the horsepower to deliver all that (double-digit) upside accumulation potential that’s possible with (100% SAFE) index annuities.

But, you may be wondering, what's an index?  And what the heck are options?

Just think of a market index as a scale that reflects the average price of a particular group of stocks or bonds. The stock index most widely used by investors is the Standard & Poor’s 500, consisting of America's 500 largest corporations.

Options are bought and sold every day, just like stocks. They give you the right (but not the obligation) to buy or sell something in the future at a pre-determined price. 

In other words, a trucking company might buy an option to purchase 10,000 gallons of gasoline next year for a specific price as a way to protect themselves from higher future prices. Or, an investor might buy options simply to earn a profit.

Example: Let’s suppose you pay $500 for the option to buy 10,000 gallons of gasoline next year at $3.00 per gallon. If the price of gasoline jumps to $4.00 per gallon, your $500 option will be worth $10,000... and you could sell it for that amount.

That’s because you own the right to buy 10,000 gallons of gasoline for $30,000 (at $3.00 per gallon) and sell it for $40,000 ($4.00 per gallon). If you sell the option, your profit will be $9,500 ($10,000 minus the $500 "premium" you paid for the option).

When insurance companies use your bond interest as "premium" to buy index options, they are doing the same thing as the buyer of gasoline options in my example. But, instead of profiting from a rise in gasoline prices, you profit from a rise in the stock market (as measured by a market index, like the S&P 500).

Is this beginning to make sense?

My point is that, like our buyer of gasoline options who generated a 1,900% return on investment when the price of gasoline went up, the buyers of index options can multiply their investment many times when the stock market goes up.

If, on the other hand, the market goes down, they let their options expire. Basically, you're giving up the relatively small amount of interest on the bonds for the opportunity of much greater upside potential.

And, at the same time, your principal and all previous gains are locked-in and can neve
r be lost!

PLUS, at the beginning of every contract year, you have a brand new starting point and NEVER have to recover any previous losses (unlike all those folks that invested directly in the market)!

And that, my friends, is the "secret sauce" and awesome power of the "Annual Reset".

So, as you can see, with index annuities (not to be confused with variable annuities, please!), the insurance company never invests your money directly in stocks or mutual funds. Instead, it invests in options on all the stocks in a particular market index.

Unfortunately, a lot of people (including well-known financial "celebrities") remain confused and think that index annuities involve investments in the stock market. 

Clearly, they do not.