Seniors and
retirees need to be aware of the dangers of investing in an
Equity Indexed Annuity. Read on to find out how to protect
yourself.
Millions of retirees are being duped into buying the latest
high-cost, high-commission product served up by the
insurance industry—Equity Indexed Annuities (EIAs).
According to the Advantage Group, a St. Louis based
research-consulting firm, sales of EIAs thru June 2003
totaled $7 billion dollars. I sincerely hope none of that
money was yours!
It’s those of modest means who seem most susceptible to the
EIA sales pitch. The average EIA investor is 58 years old
and invests $36,150. Those who are traditional ‘CD’ savers
who are dissatisfied with the low rates available recently
are especially targeted.
I don’t issue this alert lightly. I am not an alarmist. The
reason for my concern is that EIAs are such an ‘easy sale’
for professional financial salespeople. And unless you are a
financial mechanic who can look under the hood to see how
they operate, you may not realize the obvious disadvantages.
First, let me explain EIAs. They allow you to participate in
the stock market ‘good times’ while being ‘guaranteed’ of
earning a minimum of 3% during the ‘bad times’. In other
words, it is supposed to give you the peace of mind of a
Certificate of Deposit but the growth of the stock market.
As a result, EIAs are easy to sell. And with commissions as
high as 10 or 12% of what you invest, insurance agents and
brokers are motivated to recommend them!
Here are the main problems of EIAs:
- They
tie up your money for 7, 10, 12 years or more, limiting
your flexibility.
- If you
need more than just a small portion of your money before
then you will have to pay enormous surrender penalties
that can be as high as 12%! You can lose principal
because of these penalties.
- EIAs
are not regulated by the SEC or the NASD and any
‘guarantees’ are only backed by the strength of the
issuing insurance company.
- Most
EIAs will put a ceiling on how much you can earn, no
matter how much the stock market goes up. But that
doesn’t mean you can earn the maximum amount because…
- Many
EIAs have an asset fee that is subtracted from the
ceiling. A 2% asset fee is common. With a 10% ceiling
and a 2% asset fee, you can never earn greater than 8%
in any one year.
- The
insurance company determines the method of calculating
the return. The result is that you lose control and
could end up earning far less then the market index.
- You may
not earn the ‘guaranteed rate’ on the full amount you
invest. Some only pay the guaranteed rate on 90% of your
original investment and then only if you stay in for the
entire 7, 10, or 12 years.
History also
tells us that EIAs are not a very good investment. When you
run the numbers, there are no ten-year time periods since
1975 where an EIA would have outperformed the S&P 500 index.
Plus, you could access your money in an index fund any time
you wanted without the automatic surrender penalties imposed
by EIAs.
Think about it from the insurance company’s point of view.
They know that by capping your return at 10% that they can
make more than enough in the good years to pay you 3% in a
couple of bad years. Plus, they get 2% of each year’s return
as well!
A 3% minimum appears good today but you will probably feel
differently when interest rates go back to 5%, 6% or 7%. If
you didn’t feel comfortable investing in the stock market
when interest rates were 6% then don’t invest in the market
now. Your ability to sleep at night is more important then
the chance of earning a few extra bucks.
So here’s the bottom line, in my opinion. If you are looking
for income, don’t invest in an Equity Indexed Annuity. If
you are investing for long-term growth, don’t invest in an
Equity Indexed Annuity. Quite frankly, I cannot think of
anyone who would benefit from owning one.
For more information go to www.guardingyourwealth.com. I
want to here from you. Send me your questions and concerns.
Email me at jeff@guardingyourwealth.com or call
1-877-827-1463.
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