Index annuity buyers from a year ago are seeing 7 percent, 8 percent and even double-digit yields credited to their index annuity–unless they were the one-in-three buyers who stuck their money in the fixed account. Based on my modeling and actual results, index annuity buyers should always keep 100 percent of their money allocated to indexes 100 percent of the time, with three exceptions:

1. The carrier offers a five-year or longer fixed rate of 6 percent, or higher
The carrier offers a five-year or longer fixed rate of 6 percent or higher. Although the average index annuity yield was 8.2 percent from 1997 to 2002, the reality is 6 percent is likely to be better than many five-year index annuity returns.

2. You use an equity kicker method.
In my rate modeling, a blended method combining a two- or four-year index-linked return with a fixed account was competitive with annual reset methods.

3. You can predict the future.
Everyone laughs at the foolishness of trying to predict the future and then they try to do it themselves.
Today many FIAs have index caps that are double their fixed yield, meaning one good index-linked year can offset a bad one. Some rules of thumb are if the annual point-to-point cap is 175 percent or more of the fixed rate, the averaging method cap is at least double or the uncapped participation rate is at least 35 percent for an annual point-to-point or 55 percent for an averaging method, it makes sense to go for the indexed option.

A reason for using asset allocation is to avoid loss, but index annuities don’t lose. Putting money in the fixed account means you are trying to preserve a 3-percent or 4-percent gain and avoid the possibility of a 6-percent to 20-percent gain. Huh?

We are only batting .500 predicting what the weather will be the day after tomorrow, and yet many people tell me the market will be down so they’re picking the fixed account. We don’t know where the index will be in a year, so it makes sense to go with what will produce the best returns in most years.

Index annuities were designed to give fixed annuity buyers a real shot at earning higher-than-fixed annuity yields. When you put the premium in the fixed bucket it defeats the purpose of the index annuity. Unless this time is one of the exceptions, you’ll be better off mixing the premium among different indices or crediting methods and not touching it again until you cash in the annuity.