I want to thank the journalists from The Wall Street Journal, USA Today, and many local and regional newspapers that have written about the dangers of equity-indexed annuities. Investors have been warned by Suze Orman. The securities industry has been admonished by the National Association of Securities Dealers (NASD). Class action lawsuits are under way that attempt to protect seniors and get their money back.

Equity-indexed annuities are mainly sold by insurance agents with little investment-related training. Many of them aren’t licensed to sell a stock, bond, mutual fund or even a Certificate of Deposit. Yet they are ‘qualified’ to ascertain that an equity-index annuity is better then any other investment. They are right—it is better for them, but it’s sure not better for you.

These agents are beginning to feel the pressure. The lead article in the March 2006 edition of The Agent’s Sales Journal is titled “Index Annuities and Media Negativity”, written by one of the insurance industry’s strongest advocates of equity-indexed annuities.

The negative publicity, he says, is the result of “two lawsuits alleging bad agent behavior.” He goes on to say “…this attention is not questioning the merits of fixed annuities (equity-indexed annuities), but about lost revenues to the securities industry.” He concludes “the negative annuity talk will lessen later this year as reporters find something new to talk about.”

Not if I have anything to do about it! Let me respond to some of the comments in this article.  

First, the author fails to mention that the two lawsuits are class-action lawsuits, not suits by a few individuals. I believe additional class-action lawsuits will turn thousands of attorneys into millionaires much like asbestos-related lawsuits have.  

Second, I am extremely critical of their high commissions and the surrender periods that can last longer than most marriages. But I am also critical of them based on their ‘merits’. Equity-indexed annuities’ supposed benefits can be better attained, without investors being forced to lock up their money.

For instance, most people buy an equity-indexed annuity because they believe it will allow them to get the return of the stock market while guaranteeing them a return of at least 3%. Since the investor must leave their money in the contract usually for 10 years or more to get those benefits, we’ll use a 10-year time frame for comparing the alternatives.  

Let’s suppose an investor placed 60% of their money into a 10-year Government guaranteed bond and the other 40% into an S&P 500 index fund and held both for 10 years. I’ve looked at the results of this for every 10-year period since 1950—529 rolling periods.  

Here are some interesting facts. You would not have earned less than 3% per year in ANY of them! So you get the downside protection you desire. Unlike equity-indexed annuities, though, you aren’t limited by what you can earn on the upside.

The returns were greater than 6%, 80% of the time. You would have earned an average of 10% per year or more 45% of the time. Best of all you had access to your money throughout that period without automatic surrender penalties.

The upside potential is even greater if 100% is placed in an S&P 500 index fund and all the dividends are reinvested. Again, there wasn’t a single 10-year period since 1950 that the return was negative. And you would have earned over 10% per year 66% of the time.  

Third, a white-paper was done by a former SEC economist and PhD specifically on the merits of EIAs. Here’s the bottom line: “We estimate that between 15% and 20% of the premium paid by investors in equity-indexed annuities is a transfer of wealth from unsophisticated investors to insurance companies and their sales forces.”

So don’t be fooled by the smooth talking agent trying to sell you an equity-indexed annuity. Find out the facts, look at the alternatives and you will quickly see it’s not in YOUR best interest.

If you have a specific question or would like more information give me a call toll-free at 1-877-827-1463 or go to www.guardingyourwealth.com. You can also reach me by email at jeff@guardingyourwealth.com.

[Annuities] [Investing] [Insurance] [Estate] [GYW Newsletter] [Contact Us] [Ask Jeff]