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May 10, 2021 by |

Los Angeles and Orange County Financial Elder Abuse and Annuity Attorneys: What Are Buffer Annuities And How Do They Work?


Buffer Annuities Are A Type of Variable Annuity

Similarities To Indexed Annuities

Caps And Participation Rates Limit Returns

All deferred annuities are complex insurance products, and we recommend against them for senior consumers particularly.  Deferred annuities are sold by agents in three general categories: fixed, indexed, and variable.  But carriers market a variety of hybrids within those categories and buffer annuities are one of the more recent hybrid products. These buffer annuities are as complex (if not more so) than other deferred annuities.  The returns on buffer annuities is tied to a chosen index (really futures in the index without any benefit of reinvested dividends) and cap the return at predetermined percentages even if the chosen index itself moves higher.  Yes, they are as complex as they sound and present several pitfalls for the senior consumer in particular as more fully described below. Evans Law Firm, Inc. represents individuals over 60 who live in Los Angeles, Orange County or elsewhere in California and have suffered a loss due to cancellation, replacement, full or partial surrender, or high fees connected with a deferred annuity, including buffer annuities. Call us today at 415-441-8669 (or toll free at 1-888-50EVANS) for a free review of your policy. 

How Do Buffer Annuities Work

A buffer annuity is a type of variable annuity that in some ways resembles an indexed annuity.

Like indexed annuities, buffer annuities link investment returns to a market index, but may offer higher caps on market participation than indexed annuities do (though you never have 100% market participation), in exchange for less protection against losses.  In other words, buffer annuities have built-in trade-offs that invariably benefit the carrier not you.  Here’s how a typical buffer annuity works in practice:

  • Caps built into the contract limit your upside potential each rolling 12-month period. For example, say your annuity had a cap of 11%. If the index returned 5%, you would earn 5%. If it returned 20%, 30% or more, you would only earn 11%.
  • Buffers limit your losses, but only up to a certain point during the 12-month period, and you’ll be on the hook for any losses beyond that point. Say your annuity has a buffer of −10% and the index loses 10%. In that case, the insurer absorbs the loss, and your return will be flat. If the index falls 25%, the insurer absorbs the first 10% and you take the hit on the loss of next 15%.

In other words, as one industry analyst put it, “If markets decline significantly, an investor could be alarmed at the losses they experience. On the other hand, if markets do well, they could be surprised at how much a cap limits their potential upside.”  Doesn’t sound too appealing, does it?

To add to the complexity, each element (cap/participation rate/floor/buffer) can renew on a schedule set by the insurance company, not yours. Some products reset buffers and caps annually and other products hold steady with the same rates for several years at a time. As a result, the performance of individual buffer products can be very challenging to calculate and even more difficult to compare to other “similar” products. The upside participation and downside protection you get vary with the market.  One month you might have one set of options, and the next month they might change.

On top of this considerable investment risk, the contracts include surrender penalties that make it expensive to get out of a contract once you are in.  If you are concerned about market losses, consider financial products that help manage the downside while still providing the opportunity for growth without the complexity and surrender penalties inherent in buffer annuities.   For example, there are mutual funds, ETFs, or professionally managed portfolios that can help reduce the effect of sharp movements in the markets without all the costs and caps built into annuities.   Whatever you do, always consult a financial professional with nothing to gain from a sale and speak with your tax advisor before you buy or surrender an annuity.  All annuity transactions have tax consequences.

Important Takeaways On Buffer Annuities

If an agent has approached you with a proposal for a buffer annuity keep these pointers in mind:

  • Buffer annuities are complex, which can make them a challenge to understand.
  • Do not let yourself be pressured into a sale.  Take time to assess how caps and participation rates and fees impact the return an annuity would earn under a wide variety of market environments.  Understand how surrender penalties work
  • Consider alternatives such defensive mutual funds or managed accounts, which do not have the caps, participation limits, fees, and surrender penalties inherent in annuities.

Contact Us

If you live here in Los Angeles, Orange County, or elsewhere in California, Ingrid M. Evans can help you or a senior loved one if you or your loved one has lost money as the result of a deferred annuity transaction or surrender.   Ingrid can be reached at (415) 441-8669 (or toll free at 1-888-50EVANS)  or by email at <ahref=””></a>..

Some significant issuers and distributors of fixed, variable and fixed indexed deferred annuities in Los Angeles, Orange County and throughout California are listed below.  We are not in any way suggesting that any of these carriers or distributors has done anything wrong.  The list is provided solely as a reference for our readers.

AIG/American General Life Insurance Company

Allianz Life Insurance Company of North America

American Equity Investment Life Insurance Company

American General Life Insurance Company/AIG

American International Group, Inc. (AIG)

American National Life Insurance Company

Athene Annuity & Life Assurance Company

Athene Annuity and Life Company

Athene USA

Aviva Life Insurance Company

AXA Equitable Financial Services, LLC

AXA Equitable Life Insurance Company/AXA US

AXA Advisors, LLC

Brighthouse Financial, Inc./MetLife

EquiTrust Life Insurance Company

Fidelity & Guaranty Life Insurance Company

Genworth Financial, Inc.

Genworth Life and Annuity Insurance Company

Genworth Life Insurance Company

Guggenheim Partners, LLC

Guggenheim Partners/Security Benefit Life Insurance Company

ING USA Annuity and Life Insurance Company

Jackson National Life Insurance Company

John Hancock Life Insurance Company

Lincoln Benefit Life Company

Lincoln Financial Group

Massachusetts Mutual Life Insurance Company

Metlife/Metropolitan Life Insurance Company/Brighthouse Financial, Inc.

Minnesota Life Insurance Company

Nationwide Investor Services Corporation (NISC)

Nationwide Life and Annuity Insurance Company

Nationwide Life Insurance Company

New York Life Insurance Company

Northwestern Mutual Investment Services, LLC

Northwestern Mutual Life Insurance Company

Northwestern Mutual Wealth Management Company

Pacific Life & Annuity Company

Pacific Life Insurance Company


Security Benefit Corporation

Security Benefit Group, Inc.

Security Benefit Life Insurance Company/Guggenheim Partners

Security Investors, LLC

Security of Denver Life Insurance Company/Voya

Transamerica Life Insurance Company

Voya Financial Advisors

Voya/Reliastar Life Insurance Company

World Financial Group Insurance Agency, Inc.

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